Watching the melodrama of very rich people getting their comeuppance can be highly entertaining. But that’s only if their blow-ups do not cause market contagion and come back to haunt everyone. For a short time last month, regulators and market players fretted about possible ripple effects from the sudden unwinding of huge but undisclosed positions held by Archegos Capital Management in the United States. Fortunately, market conditions and investor confidence turned out to be robust. It was the mother of all margin calls for a single player, involving equities worth anywhere between US$20 billion to US$50 billion . There is a lesson here for everyone, including Hong Kong regulators and investors. Archegos is a “family office” that manages the wealth of former hedge fund manager Bill Hwang Sung-kook. It was set up in 2013 after he pleaded guilty in New York to insider trading involving several Chinese bank stocks for a hedge fund he ran. At the time in Hong Kong, he was banned from securities trading for four years. Given his chequered past, legitimate questions have been raised about how his “office”, which he essentially ran as a hedge fund, could have secured the services of so many investment banks that are among the best known on Wall Street and in international finance. It was those banks that enabled Hwang to leverage up excessively on stocks including several Chinese ones via tailor-made derivatives that hid his true positions. Unfortunately, the banks had to keep those securities on their own books so when Hwang failed to meet his margin calls, they had to unwind quickly on the market. At least two of them did not do it fast enough as to incur steep losses. Picking up the pieces of Bill Hwang’s Archegos Capital blowup When the dollar sign was flashing bright, some of those same banks that were caught up in the last financial crisis proved to have a very short memory. Last time, the wreckage was caused by derivatives such as credit default swaps for subprime mortgage loans in the US. This time, it was swaps and something called contracts for differences. Punters who have lost money due to the recent unusual price movements of GSX Techedu, the Chinese after-school tutoring service, and Baidu, the mainland’s largest search engine – among others Hwang had bet heavily on – may get some satisfaction from his blow-up. Let this be a lesson for Hong Kong’s regulators as the city aims to be a hub of family offices for very rich people. Before the city takes the plunge, just as it is trying to do the same with the SPACs craze, also known as “blank-cheque” companies, they should ask whether the risks outweigh the rewards and potential reputational damage. Unless there are sufficient safeguards to prevent something like this from blowing up in Hong Kong, they need to be extra cautious.