Nicholas Birch in Istanbul -

Turkey's first onshore hedge fund should be ready for action within a fortnight, according to Turkey's Capital Markets Board (CMB), the country's market regulator.

"Is Yatirim applied two months ago to set up what we call a free investment fund," the CMB's hedge fund expert Taliye Yesilurdu told bne in an interview last week. "Hedge funds are new to all of us, so it's taken us a while to work through some of the technical aspects of the new funds."

Once Is Yatirim gets the go ahead from the CMB, Yesilurdu added, it will probably take another month before the investment firm actually launches its new product.

Given the excitement surrounding CMB's publication on September 22 of new regulations permitting the establishment of Turkish-domiciled hedge funds, some say it is surprising how long it has taken industry players to get their act together. Indeed, Is Yatirim is so far the only firm to have applied to CMB to set up a hedge fund.

"In many countries, markets lead and regulators follow," says the deputy director of the CMB, Baris Akgul. "In Turkey, often enough, we offer new regulations only to find that not that many people are interested in following them."

Potential hedge fund directors say they are grateful for the speed with which the CMB pushed the new regulations through. But they insist the new funds were their own initiative and deny their enthusiasm for them has waned.

In November, the general manager of Eczacibasi-UBP Portfolio Management, Gokhan Guven, became the first to publicly announce plans to set up a hedge fund. And he says it's not only investors who are keen on the new funds; set up in 2005, Turkey's derivatives market is interested in them too.

Sinan Akiman, head of strategy at Garanti Portfolio Management, Turkey's market leader, says he knows of at least five funds already working to add a high-risk alternative to their portfolios.

"We're all watching the CMB and waiting," he says. "We're anxious ourselves to see how fast they are going to allow applications to proceed and what their criteria are."

Bad rep

He suspects the delays have to do with the sulphurous reputation of hedge funds in Turkey, a country which, with an estimated $70bn of hot money sloshing around in it today, is intensely sensitive to changes in the international investment climate. While foreign hedge funds are largely interested in Turkish bonds, they are also increasingly present on the stock market – US-based Lone Pine Capital bought an 8.7% stake in Dogan Holding in February.

"Actually we've had hedge funds in Turkey for over 10 years: they were called banks, and the funds they used were their own bank balances," Akiman jokes. "That's why the number of banks in Turkey is down from 70 to 20."

Small wonder then, that CMB's new regulations seem aimed at controlling the uncontrollable as much as possible. Despite being registered and regulated by the CMB, Turkish hedge funds are open only to "sophisticated investors" with minimum cash assets of TRY1 million (€538m).

"Are you sophisticated just because your granny left you money in her will," head of Eczacibasi Asset Management Salih Reisoglu asked at a recent Euromoney conference in Istanbul on structured finance.

But the real thing likely to slow the development of hedge funds is the same thing that market players say has affected the Turkish fund market as a whole: regulations restricting the founders of investment funds to banks, insurance companies and pension funds.

"For the banks that own them, investment funds are just one product among many, in many ways less attractive than straightforward deposits", says Sinan Akiman. "So they have traditionally kept [mutual fund] management fees high to keep a balance between funds and deposits."

As the fund market becomes more competitive, that is beginning to change. But the CMB's Taliye Yesilurdu admits the present structure remains a problem. "It creates a conflict of interest," she says.

Turkey's market regulators are currently working to revamp Turkish legislation along German lines. Described by Akiman as Turkey's Glass-Steagall Act – the act passed by the US Congress in 1933 that that divided brokerage and banking into infusible industries – preliminary drafting is due to be ready by November this year.

At Euromoney's seminar, Salih Reisoglu predicted that hedge funds would bring liquidity to Turkey's still volatile markets, as well as crucial diversification to Turkish companies' investment strategies.

But not everybody is convinced Turkey is on the verge of a domestic hedge fund boom.

"Like all asset management companies, we're preparing ourselves for hedge funds," says Cem Yalcinkaya, director of Ak Portfolio. "But I doubt individual investors are going to be the ones interested."

With asset management companies in Turkey rapidly expanding their range of products, he expects the brand new guaranteed funds to attract much more interest from individual investors. Legislated in February, guaranteed funds are indexed to Istanbul's stock exchange, but guaranteed against losses.

"Potentially high returns, minimal risk," says the CMB's Taliye Yesilurdu. "Ideal for the Turkish investor."

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