News that Princess Private Equity (PEY ) is abandoning currency hedges is welcome news after the strategy caused serious problems last year, leading to the cancellation of its interim dividend in November.

The shares edged up a little after last week’s announcement but remain on a wide discount of 32% below net asset value (NAV), although that is about middle of the pack for listed private equity funds, which, as I have said several times, look very undervalued.

Princess used to be a fund of funds investing through Partners Group, a global private equity firm with offices in 17 countries but headquartered in Switzerland. After a policy switch motivated by a desire to reduce the fee burden on investors, it now overwhelmingly invests in direct co-investments alongside Partners Group. Partners has assets under management of about $135bn, and Princess accounts for almost $1bn of that.

I wrote about Princess in 2017, around the tenth anniversary of its listing in London. At the time, I was relatively upbeat, praising the efforts it was making to attract investors, which included the payment of a 5% of asset value via quarterly dividends largely funded from capital.

The 66% underlying investment return it has generated over the past five years is not too bad, well-ahead of almost all global equity trusts over the period, but only merits a third quartile ranking against its private equity peer group, where funds such as HgCapital Trust (HGT ) and Harbourvest Global Private Equity (HVPE ) have managed to generate almost 100 percentage points more.

However, Princess’ five-year share price return is just 24%, 189 percentage points behind the sector leader Oakley Capital Investments (OCI ).

Princess attracted negative headlines in November when it announced it would suspend its dividend payments. The problem was amplified later that month when the closed-end fund said it would suspend all new investment activity. The trigger for all of this was Princess’ currency hedging policy.

Princes is a global fund – at the end of January 2023, 47% of the portfolio was in North America, 42% in Europe and 7% in Asia, with the balance spread across the rest of the world. For accounting purposes, its functional currency is the euro. At some point, the board and manager decided to hedge the company’s US dollar exposure.

It is not that uncommon for funds to have some hedging – to protect the revenue account from adverse currency moves, for example. However, most funds would not go to the lengths that Princess did. Moreover, I am not sure that they really made it obvious to investors that they were doing this.

In its annual report for the 2021 calendar year, foreign exchange forward contracts are listed in note 12 on page 71, but anyone that didn’t examine the report in minute detail probably would not have picked this up – there was no mention of it in the factsheets, for example.

Unfortunately, over 2021 and 2022 all they succeeded in doing was preventing investors from benefiting from a rising dollar.

At the end of June 2022, what had been a €40m (£35.5m) cash pile had been run down to €17m, and €42.5m drawn down of an €80m borrowing facility. A portfolio of senior loans maintained by the company to provide liquidity when needed had shrunk by €59m to €72m. In part, these moves reflected €63m of investments made over the first six months of 2022, but a large part of the problem was ever-increasing margin payments on its currency hedging.

By 30 September, as the dollar continued to climb relative to the euro, net current assets had fallen to -€95.6m and the company had just €9.3m headroom on an expanded (€100m) borrowing facility.

The company stressed that it was not in danger of being unable to meet its commitments, but eventually something had to give, and, in the first instance, it was decided that should be the dividend and new investments rather than the hedging strategy.

With sanity (and the dividend) restored, Princess does face the possibility of a weaker dollar in 2023. Professional investors have the option of hedging their exposure if they choose. However, as far as I am aware, there are few routes open to retail investors that want to do the same (let me know in the comments below if that isn’t true).

For what it is worth, my attitude has long been that second-guessing currency moves is pointless. They often seem illogical to me in any case. There are times when a currency can be obviously under or overvalued – purchasing power parity may provide a useful illustration of this.

On that basis, if I had to pick a major currency that seems undervalued now, it would probably be the yen. The Economist runs a ‘Big Mac’ index, comparing the cost of a Big Mac in different countries. It implies that the yen is more than 40% undervalued versus the dollar. However, extremes like this can persist for a long time.

James Carthew is a co-founder and head of investment companies research at QuotedData. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances