Turkey's fund-industry crisis is inflicting some of its heaviest losses on smaller, less-liquid stocks, widening a divide with large-cap names that have benefited from regulatory support. The Borsa Istanbul SME index, tracking small- and medium-capitalization companies, has tumbled 34% so far this month, while hundreds of stocks in the broader Borsa Istanbul All Shares Index have posted steep declines. That compares to a 10% decline in the benchmark BIST 100 index.

The selloff has been particularly severe among companies with small free floats after some became heavily owned by funds now facing liquidation. Regulatory measures and support for large-cap stocks have cushioned parts of the market, leaving smaller companies more exposed. Fund managers Tera Portfoy Yonetimi AS and Pusula Portfoy Yonetimi AS failed to meet some investor redemption requests last week, triggering stress that quickly spread into the broader market. Regulators subsequently ordered the liquidation of 131 funds, while authorities detained or arrested several financial executives as part of investigations related to the turmoil.

Many of the affected funds had built substantial positions in stocks with lower free floats, driving some sharply higher. With those funds expected to be liquidated, retail investors and other fund managers are selling such stocks in anticipation of further disposals. The turmoil has also led to a surge in margin calls, requiring investors to provide additional collateral when the value of securities backing leveraged positions falls. Investors withdrew more than 900 billion liras ($18 billion) from Turkish investment funds between Aug. 31 and Sept. 24, about 400 billion liras from money-market funds. The disruption has been visible among stocks whose soaring valuations had propelled them into Borsa Istanbul's largest benchmarks, with Destek Finans Faktoring and Katilimevim Tasarruf Finansman AS, down 57% in 10 days, among the biggest drags.