Mesenchymal chondrosarcoma is a rare, high‐grade, primitive mesenchymal tumor. It accounts for around 2–10% of all chondrosarcomas and mainly affects adolescents and young adults. We previously described the HEY1–NCOA2 as a recurrent gene fusion in mesenchymal chondrosarcoma, an important breakthrough for characterizing this disease; however, little study had been done to characterize the fusion protein functionally, in large part due to a lack of suitable models for evaluating the impact of HEY1–NCOA2 expression in the appropriate cellular context. We used iPSC‐derived mesenchymal stem cells (iPSC‐MSCs), which can differentiate into chondrocytes, and generated stable transduced iPSC‐MSCs with inducible expression of HEY1–NCOA2 fusion protein, wildtype HEY1 or wildtype NCOA2. We next comprehensively analyzed both the DNA binding properties and transcriptional impact of HEY1–NCOA2 expression by integrating genome‐wide chromatin immunoprecipitation sequencing (ChIP‐seq) and expression profiling (RNA‐seq). We demonstrated that HEY1–NCOA2 fusion protein preferentially binds to promoter regions of canonical HEY1 targets, resulting in transactivation of HEY1 targets, and significantly enhances cell proliferation. Intriguingly, we identified that both PDGFB and PDGFRA were directly targeted and upregulated by HEY1‐NCOA2; and the fusion protein, but not wildtype HEY1 or NCOA2, dramatically increased the level of phospho‐AKT (Ser473). Our findings provide a rationale for exploring PDGF/PI3K/AKT inhibition in treating mesenchymal chondrosarcoma. © 2022 The Authors. The Journal of Pathology published by John Wiley & Sons Ltd on behalf of The Pathological Society of Great Britain and Ireland.