The Capital Markets Law ("CML"), and the secondary legislation of the Capital Markets Board ("CMB") are the primary sources of legislation governing the Turkish capital markets. Accordingly, mutual funds in Turkey are established pursuant to the CML and CMB’s regulations. Under the Communiqué Regarding Mutual Funds ("Communiqué"), twelve different types of mutual funds can be established in Turkey. These are (i) Bonds and Bills Funds; (ii) Stock Funds; (iii) Sector Funds; (iv) Participation Funds; (v) Group Funds; (vi) Foreign Securities Funds; (vii) Gold and Other Precious Metals Funds; (viii) Composite Funds; (ix) Liquid Funds; (x) Variable Funds; (xi) Index Funds; and (xii) Private Funds. The CMB recently announced that amendments to the Communiqué may be made in order to allow the establishment of ‘hedge funds’ as a new type of mutual fund in Turkey. The envisaged amendments relate only to the establishment of hedge funds in Turkey and will not affect the sale of foreign hedge funds or other foreign mutual fund units.
According to the draft amendments to the Communiqué, hedge funds are defined as high risk mutual funds. The draft new provisions aim to protect investors and reduce their risks. In order to achieve this aim, the Communiqué requires that the fund units are only sold to sophisticated investors, the scope of whom are defined as local and foreign mutual funds, pension funds, investment funds, venture capital companies, real estate investment corporations, intermediary institutions, banks, insurance companies, private finance institutions, portfolio management companies, pension funds and aid funds, foundations, certain associations and real persons or legal entity investors having cash or securities of at least one million new Turkish Liras as of the date of the public offering.
The establishment procedures for hedge funds are similar to other mutual funds. Banks, intermediary institutions, insurance company pension funds, and aid funds that meet the requirements of the CMB are allowed to establish hedge funds. Hedge funds will be registered with the CMB, and a prospectus and a circular will also need to be prepared for the sale of fund units.
The draft new provisions set out certain differences between hedge funds and other types of mutual funds. The main difference is that the fund units cannot be exchanged in the stock market, and there cannot be any publications or advertisements regarding public offerings or public sales of hedge funds. Moreover, hedge fund portfolios would not be subject to the restrictions governing other types of mutual fund portfolios. Unlike hedge funds, in the other types of mutual fund portfolios, there are restrictions concerning the percentage of the portfolio value to be invested in the securities of a partnership. Portfolios are required to include securities being quoted on the stock exchange. Furthermore, the shares, bonds and other debt instruments held by the founders and managers of a fund, and the shares of companies where 20% of the share capital is owned by managers and/or the board members of the fund, cannot exceed a certain percentage in the fund’s portfolio.
The purpose of mutual funds cannot be to engage in the management of companies whose shares are owned in the fund’s portfolio. Similarly, mutual funds may, amongst others, invest in currencies and valuable metals, engage in repo and reverse repo transactions as well as purchase credit in order to reduce the risk of the fund or to provide cash flow with such investments being restricted to a certain amount. Hedge funds would not be subject to any of these restrictions.
On the other hand, as hedge funds are defined as high risk funds, there are additional precautions stipulated in the draft amendments in order to protect the investor. The hedge funds’ portfolio managers, and the employees of the intermediary institutions that will sell the units of hedge funds, are required to pass the relevant examinations of the CMB and to have sufficient knowledge and experience. Hedge funds’ portfolio managers will be obligated to establish an internal audit system including risk management systems regarding the management of the fund. In addition, hedge funds will be obligated to notify the investors, well in advance of the time period mandated for other funds, regarding important changes in the information stated in their circulars.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).