Turkey is losing confidence in its stock market: Fund scandal in Turkey – Why investors now distrust the entire stock market – Creative image on the topic, created with AI: Xpert.Digital
15,000 percent return, millions affected: What's behind the Turkish fund scandal?
MSCI examines Turkey: What consequences the fund scandal could have for investors and companies
When stock prices artificially rise: How the Turkish fund scandal can affect the entire economy
Turkey is facing a crisis of confidence in its capital markets. At the heart of the matter are funds with conspicuous increases in value, allegedly distorted share prices, and unanswered questions about the actual amount of freely traded shares in companies. At times, the affected funds managed more than US$20 billion; nearly half a million investors are affected by the ordered liquidations. However, the true extent of the losses remains unclear: fund assets, book losses, and final investor losses are not the same thing.
The potential damage extends far beyond individual funds. If investors can no longer reliably assess how stocks are valued, who ultimately owns them, and whether regulators are acting independently, the risk for the entire market increases. International investors might reduce their weighting of Turkish securities, demand higher returns, or withdraw from certain market segments. Index provider MSCI has also responded to concerns about market transparency – however, a downgrade of Turkey's index has not yet been decided.
The crucial question now is whether the authorities can conduct a transparent and comprehensible investigation into the case and clarify ownership structures, trading activities, and fund valuations. If they succeed, Turkey can regain trust. If key questions remain unanswered, higher financing costs threaten not only the affected funds and companies, but also firms that have nothing to do with the alleged manipulations.
How a fund scandal jeopardizes the financing of an economy: Those who inflate prices ultimately make capital more expensive for everyone
Turkey is facing a capital market crisis whose economic repercussions extend far beyond the losses of individual investment funds. At its core are allegedly manipulated share prices, questionable information regarding the actual number of company shares available for trading, and the question of whether state regulatory bodies intervened promptly and independently. At times, the affected funds managed more than US$20 billion. Nearly half a million investors are affected by the ordered liquidations. Thus, the issue is no longer solely about risky investment decisions, but about the reliability of a market that is meant to channel savings into productive investments.
The decisive danger is not an imminent exclusion of Turkey from international stock market trading. Such a step has neither been decided nor would it be equivalent to a potential downgrade by an index provider. The greater risk lies in gradual financial isolation: International investors could permanently underweight Turkish securities, demand higher risk premiums, or avoid certain market segments. A scandal involving individual funds could thus lead to a structural competitive disadvantage for Turkey.
The economically sound perspective is therefore this: the long-term damage is not solely determined by the amount of potential investor losses. The decisive factor is whether Turkey can credibly distinguish between legitimate entrepreneurial risk-taking and organized market abuse. Trust can be restored if ownership structures are transparently disclosed, suspected cases are independently investigated, and funds are wound down in an orderly manner. If these conditions remain inadequately met, capital will become more expensive even for companies that have nothing to do with the alleged manipulations.
An investment product becomes a problem of market order
At the center of the affair are the asset managers Tera Portföy and Pusula Portföy. The most striking feature was the increase in value of the Tera fund TLY, which at one point reportedly showed a cumulative gain of more than 15,000 percent in Turkish lira. Investigators are examining the suspicion that the funds built up substantial positions in undervalued stocks, thereby driving up their prices. Rising stock prices, in turn, increased the reported fund assets and made the products attractive to further investors.
Such a process must be assessed differently from an ordinary speculative error. Anyone who invests in a company whose business model later fails bears an entrepreneurial investment risk. However, if prices are distorted through coordinated transactions or economic connections are obscured, the very information base of the market no longer functions reliably.
This is a fundamental difference. A capital market can absorb losses as long as investors trust that prices are established under transparent conditions. It comes under structural pressure when it becomes unclear whether reported profits can actually be realized under market-based conditions.
Furthermore, there is the scope of the regulatory measures. In September, the Turkish Capital Markets Authority ordered the liquidation of 131 funds from seven management companies. This scale suggests that the economic consequences should not be reduced solely to a few conspicuous products. However, it proves neither that all affected funds were structured identically, nor that every party involved acted unlawfully.
Why a 15,000 percent return raises more questions than it answers
A 15,000 percent increase in value means that, mathematically, an initial investment, including the starting capital, has increased 151 times. 1,000 lira would thus become 151,000 lira. Such a development is not automatically proof of manipulation. However, without information about the investment period, the portfolio composition, any interim losses, and the amount of debt used, the percentage figure has limited significance.
Furthermore, this is a nominal return in Turkish lira. For economic evaluation, at least three levels must be distinguished: the reported increase in value in the local currency, the development of purchasing power after inflation, and the result after conversion into another currency. A high lira return therefore cannot be directly interpreted as a corresponding profit in euros or US dollars.
Even more important is the distinction between book profit and realized proceeds. A fund can value its shares at the last observed stock market price. However, this does not mean that it could sell all of its shares at that price. Especially with thinly traded stocks, even a small transaction can generate a high reference price, while there are hardly any buyers for a larger block of shares.
The crucial metric is therefore not only how much a share price has risen. Equally relevant is what portion of the reported assets could actually be paid out under realistic market conditions. Spectacular returns lose their economic substance if they are based on prices that collapse at the first major attempt to sell.
The dangerous feedback loop between fund inflows and share prices
The suspected mechanism can be described as a self-reinforcing cycle. A fund buys shares of a company with low trading volume. Its demand drives up the price. Since the fund already holds these shares, the theoretical value of its portfolio increases. The reported performance attracts new investors, whose deposits enable further share purchases.
As long as money keeps flowing in, this process can appear stable. The fund reports profits, investors see rising share prices, and the increased demand seems to confirm the existing strategy. In reality, however, the relationship can be reversed: It's not improved company prospects driving the fund, but rather the fund itself driving up the prices of its investments.
This becomes particularly problematic in cases of concentration. If a fund holds a significant stake in a small company, its assets depend heavily on a price it influences through its own transactions. Furthermore, if there are personal, economic, or financial ties between fund providers and the companies they invest in, the risk of conflicts of interest increases.
However, this pattern should not be used to hastily conclude that a specific criminal model applies. A manipulatively inflated stock valuation is not automatically a classic Ponzi scheme. The crucial factors are which transactions actually took place, how the participants were connected, and whether investors were deliberately misled about risks and assets.
Economically, however, even a well-founded doubt about independent price formation is enough to damage trust. Investors don't have to wait for a court conviction before withdrawing their money.
When readily available investor funds meet hard-to-sell stocks
The crisis worsens as soon as a fund's liquidity no longer meets its investors' expectations. Those who can redeem shares in the short term expect a corresponding payout. However, if the fund's assets consist primarily of difficult-to-sell positions, a structural liquidity gap arises.
This gap can remain hidden for a long time. As long as new deposits and existing cash reserves are sufficient, problematic stocks do not need to be sold. Only larger redemptions force the fund management to test the market's actual absorption capacity.
This creates a downward spiral. Share sales drive down prices. Lower prices reduce the value of the shares. More investors demand their money back. Additional sales exacerbate the price decline. A fund can thus come under considerable pressure even if not every one of its holdings is economically worthless.
This creates a distribution problem: Investors who exit early may still be paid out at comparatively high valuations. The remaining investors then bear a larger share of the losses and settlement costs.
Redemption restrictions or temporary suspensions can limit this unequal treatment. However, they do not solve the valuation problem. A redemption freeze does not create additional buyers for illiquid shares. It merely buys time to value and liquidate assets in a more orderly manner. Whether this results in a better return depends on the actual quality of the investments.
Why $20 billion in fund assets doesn't mean $20 billion in loss
The figure of more than 20 billion US dollars conveys the scale of the affected funds, but should not be confused with a fixed total loss. Assets under management are a variable. An investor's loss only arises from the relationship between invested capital, distributions already received, and the assets that can ultimately still be realized.
If the valuations were inflated before the collapse, the reported fund volume may have included substantial book profits. Their disappearance is economically significant, but not the same as a corresponding loss of originally invested capital.
Conversely, the actual burden on individual investors can be particularly high if they invested shortly before the crash. Those who bought in at artificially inflated share prices may have borne a disproportionate share of the subsequent correction.
The fact that almost half a million people are affected says nothing about the distribution of the damage. Small private savings, larger fortunes, and investments that may have already been partially paid out must be considered separately. An average figure would obscure these differences.
A reliable assessment of losses would therefore require detailed information on deposits, returns, valuation dates, remaining assets, and collateral. Until this information is available, precise total loss figures should be treated with caution. Distinguishing between fund volume, book loss, and final financial loss is not a linguistic subtlety, but rather a prerequisite for a sound analysis.
The damage to political trust extends beyond individual suspects
The investigation now involves more than 430 people. Among the prominent suspects is former minister Fatma Betül Sayan Kaya, who is in custody and denies any wrongdoing. She faces allegations related to allegedly gaining an unfair advantage through information and securities trading. The opposition claims that she made a profit of approximately $43 million from an investment of around $3 million. These figures should be treated as allegations, not as legally established facts.
The former head of the Istanbul Stock Exchange, Korkmaz Enes Ergun, was also arrested. The chairman of the Banking Supervisory Board (BDDK), Şahap Kavcıoğlu, requested his dismissal from the president and rejected accusations against himself and his agency. It is important to distinguish between the responsibilities of the two bodies: the BDDK is not the same as the SPK, which is responsible for capital market matters. Political pressure on multiple institutions does not replace a thorough investigation into their respective responsibilities.
However, this creates a common problem for investors. The more suspicions extend to individuals in politics, stock exchange organizations, and regulatory bodies, the more difficult it becomes to classify the affair as isolated misconduct by individual market participants.
The damage to economic confidence does not depend on whether every publicly raised allegation is later confirmed. The mere impression that privileged players might be informed earlier or use rules differently than ordinary investors increases perceived uncertainty. This uncertainty translates into more cautious investment decisions and higher return demands.
The central question is whether rules apply equally to everyone
Capital market supervision fulfills more than a technical control function. It is intended to ensure that information is published in a timely manner, conflicts of interest are limited, and market participants are treated according to uniform rules.
When this expectation is shaken, an information discount occurs. Investors then no longer assess a company's profitability solely. They also consider the possibility that other market participants have better political access, earlier information, or more favorable exit opportunities.
Particularly damaging would be the impression of selective law enforcement. If individual prominent figures are prosecuted while economic networks and institutional failures remain unresolved, publicly visible prosecution may still be insufficient. Conversely, it would be equally problematic to present as many arrests as possible as evidence of successful oversight due to political pressure.
What matters are verifiable results: traceable transaction chains, reliable ownership data, independent valuations, and legally admissible evidence. The number of accused parties is no substitute for this.
A credible investigation must also distinguish between criminal culpability, regulatory failure, and poor economic investment decisions. These categories can overlap, but they don't have to. This very differentiation reveals whether a state is addressing a scandal institutionally or merely managing it politically.
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Free float: A key international problem
Why dispersed ownership is becoming a key international problem
For international investors, the question of how many shares are actually freely tradable is particularly relevant. This free float differs from the total number of shares in a company. Long-term controlling stakes are generally not available to the market in the same way as widely distributed public shares.
The distinction becomes difficult when shares are formally held by funds but remain economically subject to the influence of a corporate environment. On paper, this can result in a larger freely available holding than is actually traded independently.
This doesn't just affect individual key figures. Index providers use investable market capitalization data to classify and weight securities. An excessively high free float can therefore make a company appear larger or more tradable for international portfolios than it actually is under realistic conditions.
MSCI has addressed precisely this issue. Institutional investors have expressed concerns about potentially coordinated trading activities and unreliable free float estimates. Among other things, they are demanding verifiable information on beneficial owners as well as robust monitoring and enforcement of the rules.
The technical question of free float thus becomes a question of market integrity. Anyone who doesn't know which shares are actually independently available cannot reliably assess either the liquidity or the potential impact of their own buying and selling.
What MSCI has actually frozen and what it hasn't
In October, MSCI suspended certain changes to Turkish stock indices. These include new additions to the relevant investable market index, upgrades to larger size categories, and certain increases in the number of stocks and investability factors used in the index calculation. Turkey currently retains its emerging market status; no downgrade has been decided.
This distinction is important because freezing certain index adjustments does not mean a stock market closure or a general ban on Turkish stocks. Likewise, it does not preclude all index changes. The adjustments announced in November demonstrate that downward movements between index categories and removals are still possible.
Sabancı Holding and Astor Enerji are scheduled to move from the standard segment to the smaller companies segment at the close of trading on November 30. Additionally, the removal of 18 Turkish stocks from the corresponding small-cap index has been announced. However, these changes alone do not imply that every affected company is involved in the fund scandal.
The economic signaling effect remains considerable. An international index provider does not necessarily doubt the entire Turkish business landscape, but questions certain prerequisites for its reliable representation.
This affects a fundamental function of indices: they are meant to translate complex markets into comprehensible, investable rules. If the underlying ownership and liquidity data become uncertain, this translation loses reliability.
June 2027 is a checkpoint, not a fixed crash date
MSCI has announced that it may consider further steps if progress is insufficient by June 2027. This includes a possible consultation on a downgrade from emerging market to frontier market or to a separately managed market. However, there are different decisions to be made between such a review, a consultation, and actual implementation.
A downgrade would primarily affect the allocation of international investor funds. Funds that closely track an emerging market index would have to sell Turkish shares if the index were removed. Actively managed funds could also be forced to make adjustments or voluntarily reduce their holdings, depending on their mandate.
However, this does not imply a general investment ban. Other funds could continue to hold Turkish stocks. Specialized investors might even consider additional purchases if valuations fall significantly.
The crucial factor is the asymmetry of capital flows. Selling pressure from large, existing investment universes does not necessarily have to be offset by equally high inflows from a new segment. New buyers may demand higher returns or only enter the market after a significant price decline.
The timing is also uncertain. Markets often react to expectations before a formal decision is made. Some potential sales could be anticipated. Therefore, it would be irresponsible to deduce a precise future capital outflow from the mere threat of a downgrade.
Capital outflows indicate nervousness, but do not yet explain the cause
In the seven weeks ending October, foreign investors withdrew a net total of approximately US$3.65 billion from Turkish securities. The majority of this withdrawal was in bonds. This composition is crucial for interpretation: A scandal involving equity funds can worsen the general perception of risk, but it does not automatically explain every movement in the bond market.
International portfolio decisions depend on interest rate expectations, exchange rate risks, global risk appetite, and the relative attractiveness of other countries. Profit-taking and hedging transactions also play a role. Therefore, temporal proximity alone is not sufficient evidence of a clear cause-and-effect relationship.
Similarly, three factors must be distinguished: actual cross-border capital movements, valuation losses on existing investments, and reallocations within Turkey. If a domestic investor sells a fund unit and deposits the proceeds in a Turkish bank, the money does not automatically leave the country.
Nevertheless, financing is changing. Bank deposits may grow while equity funds lose capital. Companies may then become more dependent on bank loans, even if overall economic savings initially remain domestic.
For the analysis, therefore, the dramatic term "capital flight" is less helpful than the precise question of who is selling which assets, in which currency the transactions are settled, and where the proceeds subsequently flow.
How a stock market scandal can affect the lira and monetary policy
The transition from the stock market to the exchange rate occurs through investment decisions. If foreign investors sell Turkish securities and convert the proceeds into foreign currency, this can put additional pressure on the lira. However, if they sell shares and then acquire other lira-denominated investments, the immediate exchange rate effect is different.
A weaker currency can increase the cost of imported intermediate goods and energy. Companies with foreign currency liabilities but predominantly domestic revenues then face greater burdens. Companies with corresponding export revenues are in a different position and can offset some of this risk economically.
This creates a potential tension for monetary policy. Losses of confidence may necessitate higher yields to compensate investors for currency and market risks. Higher interest rates, in turn, dampen credit demand and investment.
However, it would be too simplistic to conclude that this inevitably leads to a new currency crisis. The actual impact depends on the magnitude of the outflows, monetary policy, currency reserves, expectations, and general economic developments.
The relevant point is different: Avoidable damage to confidence in the capital market makes economic policy management more difficult. The central bank can influence liquidity and interest rates. However, it cannot, through monetary policy measures alone, ensure that owner disclosures, fund valuations, and supervisory decisions are once again considered credible.
Even uninvolved companies will pay the bill
When investors perceive a market as less reliable, they typically demand higher risk compensation. For stocks, this tends to mean lower accepted valuations. For bonds, the effect can manifest as higher yields. Bank loans may be subject to additional collateral and stricter terms.
This is particularly problematic for a financially sound company. It may have orders, technology, and a viable business model, yet still be able to obtain more expensive financing because its location is subject to a higher general risk discount.
The mechanism operates through the cost of capital. An investment project is only worthwhile if the expected returns sufficiently exceed the financing costs and the risks involved. If this threshold increases, projects are scaled down, postponed, or abandoned.
Companies that rely on new equity capital can be particularly affected. Falling valuations mean that existing owners have to give up a larger stake in the company for the same amount of financing. Some then forgo raising capital altogether.
In the long run, this impacts productivity. If innovative or expanding companies have more difficulty accessing capital, while established players with existing banking relationships remain comparatively protected, the distribution of financing deteriorates. The damage of a stock market scandal therefore lies not only in lost assets, but also in investments that subsequently never materialize.
So far, no contagion has been proven for Europe's financial system
So far, no direct contagion of European banks or financial markets is apparent. This does not mean the situation is completely under control, nor does it justify declaring an international systemic crisis. A reliable assessment would require concrete data on loan exposures, securities holdings, collateral, and counterparty relationships.
Potential transmission channels still exist. International banks could be affected through corporate loans, trade finance, or local investments. European companies could experience payment defaults from Turkish business partners. Asset managers could record losses on Turkish investments.
However, such connections are not automatically systemic. Crucial factors are their magnitude, the loss-bearing capacity of the respective institutions, and whether multiple burdens occur simultaneously.
For the real economy, a gradual effect is more plausible than a sudden pan-European financial shock. If Turkish companies become more cautious with investments, their demand for imported machinery and equipment may decline. If payment terms worsen, the costs for hedging and supplier financing will increase.
Turkey's economic importance as a production, trade, and sales location does not disappear as a result. However, it may be associated with higher financing costs and larger safety margins. For long-term business relationships, institutional reliability is therefore just as relevant as a favorable exchange rate in the short term or low production costs.
Why blanket rescue promises would create new perverse incentives
The high number of affected investors is creating political pressure for action. However, full government reimbursement would be economically problematic as long as the extent, causes, and distribution of the losses remain unclear.
Those who are allowed to keep speculative profits privately, but can pass on all losses to the general public, are incentivized to take excessive risks. At the same time, it would be inappropriate to dismiss potential deception or institutional failure as simply bad luck for investors.
A viable solution must therefore differentiate. Assets obtained through criminal proceedings should be secured within the framework of due process and made available for potential claims. Victims need transparent information about their claims and the status of the settlement. In cases of proven breaches of duty, those responsible must be investigated.
A fair distribution of the remaining assets is particularly important. Differences in information or preferential payouts must not result in well-connected investors being better off than others.
Government support can be justified where it ensures orderly procedures, law enforcement, and the proper functioning of the market. However, this does not mean that all book profits or speculative expectations should be guaranteed. Trust is not built by retrospectively eliminating every risk of loss, but by predictable rules for managing it.
The most effective reform begins with the beneficial owners
A sustainable solution must begin with transparency regarding ownership and influence structures. What matters is not only which legal entity holds shares, but also who is economically behind them and what connections exist between funds, companies, intermediaries, and major investors.
When investments are spread across multiple funds and companies, formally separate positions may be economically linked. Effective supervision must be able to identify such connections without casting suspicion on every legitimate investment structure.
Equally important is realistic liquidity management. Funds should align redemption terms and investments so that short-term payout promises are not systematically based on assets that are difficult to sell. Stress tests must take into account the possibility that several funds could sell the same shares simultaneously.
In addition, independent valuations and monitoring of unusual trading patterns are essential. A steadily rising price is not a sign of quality if trading volume is low and the pool of active buyers is limited.
The international dimension also demands transparent communication. Finance Minister Mehmet Şimşek announced talks in December with MSCI management and international investors regarding reforms and concerns about the Turkish capital market. Such talks can clarify expectations, but they do not replace verifiable changes in day-to-day market operations.
Three possible development paths and their economic logic
A favorable outcome would be a credible resolution. The funds would be wound down in an orderly manner, ownership structures disclosed, and responsibilities clarified independently. International investors would recognize that the regulator is not only identifying existing problems but also permanently limiting them. In this case, the crisis could even lead to more robust market structures in the long run.
A moderate scenario would represent incomplete stabilization. The immediate panic subsides, individual legal proceedings progress, but key transparency issues persist. Turkey may retain its current index status but will have to accept permanently higher risk discounts. The market continues to function, but it utilizes its financing potential less effectively.
An unfavorable scenario would be a continued downward spiral of confidence. Further uncertainties, political interventions, or unequal treatment would exacerbate skepticism. International investors would reduce their exposure, liquidity would decrease, and a potential downgrade would intensify the pressure to adapt.
None of these scenarios is inevitable. Nor can their probability be reliably determined as an exact percentage based on the available information. Crucial factors are observable developments: the quality of the settlement, the disclosure of economic connections, the consistency of legal enforcement, and the actual tradability of the securities in question.
The most meaningful leading indicator is therefore not solely the next daily gain of the BIST 100. A short-term price recovery can occur even without institutional improvements. A more significant indicator is whether investors can once again assess their risks based on reliable information.
The real test is a capital market without special rights
The Turkish fund scandal demonstrates how quickly problems with seemingly specialized investment products can spread to the perception of an entire economy. The connection arises from trust: in prices, ownership details, oversight, the judiciary, and the equal treatment of all market participants.
It would be wrong to reduce the Turkish economy to allegedly manipulated funds. Equally wrong would be to dismiss the situation as mere overreaction by nervous investors. A high-performing production hub needs a reliable financing hub. Industrial substance and institutional credibility are not interchangeable.
The crucial economic policy task, therefore, is not to defend a particular stock market level. It is to re-establish conditions under which rising prices can be seen as the result of reasonable expectations and not as a possible expression of hidden entanglements.
Maintaining emerging market status alone would not be sufficient proof of success. If financing remains expensive, investors distrust information, and companies avoid the capital market, the formal category would only be of limited economic benefit.
Turkey can limit the long-term damage if it treats the crisis as an institutional test. For this, it doesn't need guaranteed dream returns, but rather verifiable ownership structures, realistic valuations, fair settlements, and oversight whose rules apply regardless of political affiliation. If this fails, the costs will not only be borne by the directly affected investors. Capital will become scarcer, more cautious, and more expensive for the entire economy.
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