On September 16, Pusula Portfoy told some of its investors that they could not have their money back that day. Within hours, the Istanbul stock exchange was falling fast enough that trading stopped automatically. The BIST 100, Turkey’s main index, closed down 5.54 percent, and at its worst point in the session it was down 7.7 percent. About a billion dollars left Turkish investment funds in a single day.
What makes this worth a closer look is which product broke first. One of the funds involved was a money market fund — the kind of thing people buy precisely because they expect to turn it back into cash on any ordinary morning. When that gate closes, even for a day, the problem is usually not one manager’s bad week. It is a liquidity mismatch: the fund promised daily cash, but the things it owned could not be sold in a day.
So what did it own? Mostly small Turkish companies with very few shares actually trading hands. That choice was not an accident, because it was also the engine of the returns. Two Pusula Portfoy funds were up 164 percent and 144 percent in the first seven months of this year, according to the Financial Times. When a fund keeps buying a stock that almost nobody else trades, the price goes up, the fund’s reported value goes up, new money arrives because the numbers look good, and that new money buys the same stock again. On the way up, this looks like skill.
Then the rules changed. In late August, Turkey’s Capital Markets Board told funds to cut back concentrated positions in illiquid shares and gave them a deadline. Read on its own, that is a sensible rule — global index provider MSCI had already flagged concerns about this kind of trading in June. But a deadline applied to everyone at once means everyone reaches for the exit on the same morning. Selling pushed prices down, lower prices cut fund values, lower values brought more withdrawal requests, and more withdrawals forced more selling. This is the same machinery I wrote about in forced deleveraging — the seller is not choosing to sell, and the market knows it.
The official response was to take the process away from the managers. On September 17, the regulator froze trading in funds run by seven firms and ordered 130 of them liquidated, covering roughly 21.4 billion dollars and about 353,000 investors. Thirty-eight people were referred to prosecutors over suspected share manipulation, several executives were detained, and the finance ministry’s stability committee called the episode temporary and manageable. The central bank made it cheaper and easier for banks to borrow overnight, so that cash for redemptions would not run dry.
That settles who is in charge. It does not settle the harder question, which is what those 130 funds are holding and who buys it. A liquidation still has to sell the same thin small caps into the same market that just showed what happens when they are sold. What a forced seller can actually get is rarely what the last quoted price said — the gap between the two is the whole idea behind liquidation value.
Korean readers will find the shape familiar. Lime and Optimus also promised liquidity that the underlying assets could not deliver, and there too, retail money arrived faster than the market could absorb it. The differences matter, though. No fraud has been established here, and the scale is larger by an order of magnitude. The other difference is inflation. With prices rising around 30 percent a year, this money is not going back into a savings account. It has to go somewhere — property, dollars, gold — and wherever it lands becomes the next thing to watch, in the same way that leveraged retail money in Korea moved the market twice: once going in, once coming out.
One date to keep. MSCI said it could open a consultation on moving Turkey from emerging to frontier market status unless regulators show progress by November. Funds that track emerging market indexes would then have to sell Turkish shares — not because anything new went wrong, but because a label changed.
My take: Ask where the returns came from, and you’ve found where the exit isn’t.
Not advice. Just how I see it.