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Turkish Lira Trades Led to $139M in Losses for Hedge Fund

This article was originally published on ETFTrends.com.

GF Securities Co.'s GTEC Pandion Multi-Strategy Fund SP got burned by foreign exchange trades in the Turkish lira during the summer of 2018, leading to losses that amounted to $139 million and caused prime broker Citigroup to execute margin calls.

Bloomberg reported in December that Citigroup was facing up to $180 million in losses stemming from a loan to fund the trades by GF Securities. The meltdown reached Citigroup's board, which called for a reorganization of its prime brokerage business.

Now, details of the trade are coming to light. Per a Bloomberg report, the "bank in January indicated that it took a charge of $100 million to $200 million for losses tied to loans to an Asian hedge fund it didn’t identify. Some of the charge may be reversed, Chief Financial Officer John Gerspach said at the time."

Related: Turkey ETF Plunges on Weakening Confidence in Lira Currency

Last summer, low interest rate levels, high inflation and geopolitical tensions weighed heavily on Turkey’s economy. In addition, U.S.President Donald Trump imposed sanctions on Turkey’s interior and justice ministers for their role in the internment of U.S. pastor Andrew Brunson as well as other Americans for terrorism.

Furthermore, Turkey also felt the pangs of President Trump’s decision to impose tariffs of 25 percent on imported steel and 10% on imported aluminum. The country's economic issues and the geopolitical tensions with the United States gave the Turkish lira no reprieve, hitting all-time lows against the U.S. dollar.

In an effort to prop up the currency, the Turkish central bank lowered the reserve requirement for banks to improve liquidity conditions.

Turkey ETF Recovers

After a loss of 41.48 percent in 2018, the iShares MSCI Turkey ETF (TUR)  is recovering nicely with a 13.43 percent year-to-date in 2019 thus far. TUR tracks the investment results of the MSCI Turkey Investable Market Index (IMI), which consists of stocks traded primarily on the Istanbul Stock Exchange (ISE).

Local elections are scheduled to take place in Turkey this Sunday, which could once again bring TUR into the spotlight. Voting against officials who are loyal to President Recep Tayyip Erdogan efforts could be seen as a backlash against the enigmatic president.

“The question is whether Erdogan will be able to restrain himself after the elections,” said Fadi Hakura, Chatham House’s Turkey analyst. “Turkey needs to adopt long-term measures that require patience and Erdogan doesn’t have that patience. If he loses major cities in the elections, a more interventionist burst of economic growth measures may come, such as pumping credit to the economy.”

TUR fell 8 percent as of 12:00 p.m. ET on Wednesday.

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