The idiom “practise what you preach” holds people to account for their behaviour, at the risk of being labelled hypocrites if they do otherwise. In the case of the Hong Kong Monetary Authority the risk if it had not practised what it preached may now be measured in hundreds of millions, if not billions of dollars. That would have been the extent of losses to the Exchange Fund, Hong Kong’s war chest to defend its dollar against attacks by speculators. The impact on the fund – money that belongs to Hong Kong people – would have come on top of a record loss on normal investments of HK$265.5 billion (US$34 billion) in the first nine months of the year, including more than HK$100 billion in the third quarter alone. Hong Kong has its conservative financial regulators to thank for “dodging a bullet”, by maintaining resistance to opening the doors to cryptocurrency products for investors – and following their own advice. As a result, many crypto entrepreneurs – including management of cryptocurrency exchange FTX – decamped to friendlier jurisdictions, Singapore among them, before the collapse of FTX had a domino effect. The city state’s Temasek Holdings, held up as the gold standard among global sovereign wealth managers, wrote off US$275 million from its exposure to FTX. Hong Kong’s main lesson from FTX’s collapse? More regulation is needed The Exchange Fund is to be commended for abiding by its own counsel, reflected in asset allocation of 72 per cent in bonds, 12.3 per cent in offshore equities, 6.6 per cent in deposits, 5.1 per cent in overseas property or other private-equity investments, and 4 per cent in Hong Kong stocks. Even so, the fund still fell victim to a “triple whammy” of falling valuations for equities, bonds and currencies. Moreover, the currency peg to the rising US dollar is reflected in writedowns when assets are converted back to the Hong Kong dollar. The strategy is as prudent as it can get. If investment allocation included much more than 16.3 per cent in the stock markets there would be room to say it was too aggressive. The markets are probably more volatile than anything but, that said, they are on the rebound as the mainland shows signs of relaxing Covid-19 controls, and tentative signs have emerged that the current cycle of rising interest rates may be approaching its peak. The fourth quarter is supposed to be better, but not enough to offset losses, and 2023 will still present challenges because inflationary pressure and interest rates remain high. How the Fed played a key role in the making and unmaking of FTX Amid all the unknowns that lie ahead two things are known – that Hong Kong’s monetary policy is tied to that of the United States Federal Reserve, and interest rates will remain high next year. So what the Exchange Fund does in this environment will be the real test of its mettle. Prudence has upside and downside. It all comes down to remaining vigilant and investing wisely for the future.