Turkey Orders Liquidation of 131 Investment Funds Amid Ponzi Scheme Allegations

Turkey's Capital Markets Board (SPK) has taken decisive action by ordering the liquidation of 131 investment funds, following a wave of investor redemptions that revealed potential Ponzi-like schemes. This move, announced on September 17-18, affects around 350,000 investors and over $18.3 billion in assets, equivalent to approximately 890 billion Turkish liras.

The funds involved were managed by seven companies, including Tera Portföy and Hedef, which reportedly engaged in practices that created a self-reinforcing bubble. These funds invested heavily in thinly traded stocks, inflating their prices and returns, which in turn attracted more investor capital. However, when investors began to withdraw their funds, the underlying stocks could not absorb the selling pressure, leading to massive outflows that reached $1 billion in a single day.

In response to the crisis, the SPK suspended trading in the affected funds and filed criminal complaints against several individuals for alleged share-price manipulation. Executives from Tera and associated firms have been detained as part of the ongoing investigation.

The fallout from this crisis has been significant, with Turkey’s benchmark BIST 100 index dropping between 6% and 8%. To manage the liquidation process, the SPK appointed Isbank and state-run Ziraat Bank to oversee the conversion of the funds’ holdings into cash, with a goal of distributing proceeds to investors within three months.

Finance Minister Mehmet Şimşek has sought to downplay the situation, framing it as an isolated incident rather than a sign of systemic risk within the financial system. He emphasized that the issues are localized, aiming to reassure investors amid the turmoil.

The forced liquidation of these funds will likely create ongoing selling pressure in the market, as a substantial volume of stock will need to find new buyers. The broader implications for Turkey’s economic landscape may lead to regulatory reforms focusing on fund liquidity management and oversight in the asset management sector.

New Developments in Investment Fund Liquidation

• On September 18, 2023, DWS announced the full liquidation and dissolution of its RREEF Property Trust, managing approximately $337 million in assets.
• The fund faced significant redemption pressures, fulfilling only 67.6% of redemption requests in June 2023, leading to a shortfall of 32.4% for investors seeking withdrawals.
• RREEF has suspended new share sales, its share redemption plan, and its distribution reinvestment plan effective immediately.
• Despite respectable performance numbers, with Class I shares delivering a 6.35% annualized total return since inception, the board concluded that liquidation would optimize shareholder value under current conditions.
• DWS is also facing challenges in Germany, where its open-ended real estate funds have seen valuation markdowns of up to 7.3% and increased outflows.
• The liquidation plan requires stockholder approval at a special meeting, highlighting the broader issues facing the REIT sector, as evidenced by Blackstone's BREIT hitting its redemption cap in late 2022.