The efforts of President Recep Tayyip Erdogan’s aides to limit the fallout from the investment fund hurricane that rattled the Istanbul stock exchange last week are running into headwinds.

Borsa Istanbul (BIST) share prices plummeted by over 5% on September 16 after one fund defaulted and others delayed payments amid a contagious sell-off triggered by tighter Capital Market Board (SPK) rules and news of a criminal investigation into several fund management companies.

The fund managers exploited transparency gaps in market regulations to inflate the values of their funds and of companies in which they invested, allegedly deceiving small investors and making fortunes at their expense. 

The slide was only halted the next day after SPK interventions, a substantial central bank liquidity injection, sales of some $5bn from central bank reserves and extensive share purchases made by the public-sector Turkish Wealth Fund (TWF/TVF).

The costs are still being counted. Trust in the markets has been damaged. The losses incurred by hundreds of thousands of hedge fund investors and millions of stock market investors may further reduce demand for goods and services at a time when the economy is struggling under the weight of high interest rates, soaring inflation, rising fuel prices, stagnant exports and depressed automobile and property sales.

Politically connected

September 21 saw the list of suspects lengthen with the detention of 15 officials of housing finance company Katilimevim (IST: KTLEV) on fraud charges. Meanwhile, the SPK extended its initial optimistic deadline for the liquidation of the 131 funds at the centre of the fiasco from three months to six.

News emerged of transfers to Swiss bank accounts totalling almost €40mn by the chairs of the Pusula fund management and holding companies. Meanwhile, veteran columnist Erdal Saglam spoke of claims that the 12 individuals who participated in one hedge fund before it was opened to the public had made profits of 10,000% – and that most of them were politically well-connected.

A university rector and a former high-level bureaucrat and ambassador are known to have been board members of companies in the Tera financial services group (IST: TERA). Founded by Emre Tezmen – himself the son of an ex-bureaucrat and member of parliament – the group ran the largest of the seven implicated fund management companies.

Suspicious delay

Critics have seen the slow-motion performance of the SPK as evidence that the crafty fund managers were protected by friends in high places.

Tip-offs from Morgan Stanley Capital International (MSCI) and other global equity market trackers were first received in late 2025. The SPK itself has since confirmed that the issue was discussed in December 2025 and a working group established.

Yet some funds and shares continued to rocket, in full view of the financial media. In the first half of 2026, four hedge funds were up by over 100%. The astronomical performances of two nebulous financial entities, Hedef Holding (IST: HEDEF) and Destek Finans Faktoring (IST: DSTKF), would soon make them Turkey’s second and third-largest listed companies on paper.

Despite a belated SPK move to exclude shares held by company owners via funds from free float calculations, MSCI continued to call for transparency, surveillance and enforcement. S&P Dow Jones Indices put Turkey on a watchlist for a downgrade to frontier market status. MSCI threatened eventually to do likewise. FTSE Russell froze some of its index changes.

The SPK finally published its eagerly anticipated new manual for investment funds on August 28. This 88-page document is packed with new rules, forcing funds to diversify their portfolios, and closing all the loopholes. Days later, the SPK also decreed that companies must reveal the names of any investor holding 3% or more of their shares – down from 5% previously.

These new rules helped to precipitate the crisis they were intended to avoid.

“Caste system”

The SPK appears to have accelerated its work only after its head Ibrahim Omer Gonul was replaced by his former deputy Mahmut Sutcu in May.

Social democratic New Party (YP) leader Ozgur Ozel has demanded that the authorities reveal who sold stock in the toxic funds and companies at the top of the market. Erhan Usta, a deputy leader of the nationalist Good Party (IYI), wanted to know which politicians and high-level public officials had traded in these papers.

Fatih Erbakan, leader of the Islamist New Welfare Party (YRP), has spoken of a “caste system” topped by “fathers who got rich quick and their spoilt sons” and by privileged bosses with no respect for the law who always manage to hold onto their ill-gotten gains and be photographed with the country’s leaders.

Tezmen has his own conspiracy theory: he has appealed to Erdogan for support in the face of a “gigantic attack” intended to weaken the growing local and national hold on the markets and prevent the nation from having a say in its own economy.

Over to the courts

The administration has sought to downplay the significance of the crisis on the one hand and to focus attention on criminal investigations on the other.

Treasury and Finance Minister Mehmet Simsek has underlined that only a tenth of the fund sector is affected, that the companies concerned have been isolated and that no systemic risk remains. Elements in the ruling Justice and Democracy Party (AKP) and the business world who believe that the minister’s orthodox policies are doing more harm than good may attempt to use the funds affair to undermine him.

Justice Minister Akin Gurlek – increasingly the president’s right-hand man – has associated himself closely with the investigations. On September 10, just as the troubles of Tera and fellow fund manager Pusula began to hit the headlines, he told court reporters in Istanbul that they were coordinating with the SPK on “manipulative transactions” on BIST.

On September 17, the SPK referred 38 suspects to the judiciary while sanctioning others. On September 18, Gurlek confirmed that four fund manager chairs and board members had been remanded in custody while 51 had had their assets frozen and been banned from travelling abroad.

No pay-back?

Erdogan has yet to comment. He is unlikely to accept any responsibility and may well accuse the oppositions of slander and rocking the boat. Court cases will stand as proof of the administration’s tough stance but will not be rushed. Some suspects will receive long prison sentences, but others may get off lightly.

Public officials – particularly high-level officials – are unlikely to be indicted. Some figures may eventually be replaced but there are not likely to be resignations or sackings specifically linked to the scandal. The opposition will probably demand a parliamentary enquiry, but the call would be rejected.

Calls for those who benefitted from the artificially inflated fund values and share prices to be made to pay damages to small investors who lost out could be dismissed as impractical.

Given Turkey’s fast-moving political agenda and the authoritarianism and power of the administration, the investment fund scandal will not constitute a major threat to Erdogan’s administration. However, Erdogan may now have to work just a little bit harder for his next term in office.