Turkey Imposes Stricter Rules on Hedge Funds to Curb Market Manipulation

Turkey's market regulator has tightened rules for hedge funds, imposing new limits on concentrated stock holdings and investments in affiliated entities. The move, announced by the Capital Markets Board on Saturday, aims to address growing concerns about potential price manipulation and distorted valuations in the country's equity market, according to a report by Bloomberg.

New Investment Limits

The updated guidelines introduce several key restrictions on hedge fund portfolios to reduce concentration risk and conflicts of interest. Funds will have until the end of 2026 to fully comply, with a phased reduction of excess positions required by October and November of this year.

Key new rules include:

• Free-Float Limits: A fund's holding of a single company's free-floating shares will be capped at between 2% and 8%, depending on the issuer's free-float ratio.
• Related-Party Cap: Funds are now prohibited from investing more than 20% of their portfolio in capital-market instruments issued by entities affiliated with their own management.
• Portfolio Concentration: The total value of individual securities that each account for more than 5% of a fund's portfolio cannot exceed a combined 20% of that portfolio.

Addressing Market Concerns

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The regulatory action follows observations that some Turkish investment funds have achieved significant control over the shares of relatively illiquid companies. This has coincided with unusually large fund returns and sharp increases in certain stock prices, raising red flags about potential price manipulation and coordinated trading between related accounts.

International Scrutiny

The new rules come as Turkey's market faces increasing scrutiny from global index providers. MSCI, S&P Dow Jones Indices, and FTSE Russell have all previously raised concerns about market accessibility, shareholder transparency, and the accuracy of free-float data in Turkey.

MSCI has specifically warned it could review Turkey’s emerging-market classification if authorities do not improve transparency ahead of a November assessment. The index provider removed several Turkish stocks from its small-cap index in May over free-float issues and in June cited concerns about short-selling restrictions and what it termed “coordinated trading.”