The new approach to asset allocation treats private markets as an alternative to public stocks and bonds, not just a small add-on. This means integrating them directly into the core equity and debt portions of a portfolio to enhance returns and diversification.

Historically, private equity was pursued for its potential outperformance (alpha). Today, with shrinking public markets, its main value is providing diversification and access to a growing universe of private companies that are no longer available on public exchanges. This makes it a core portfolio completion tool.

Private equity and venture capital funds create an illusion of stability by avoiding daily mark-to-market pricing. This "laundering of volatility" is a core reason companies stay private longer. It reveals a key, if artificial, benefit of private markets that new technologies like tokenization could disrupt.

Cliff Asness coined the term "volatility laundering" to describe how private equity masks its true risk. The strategy is fundamentally levered equity, which is highly volatile. By not marking to market daily, firms smooth returns and report low volatility—an accounting fiction, not an economic reality.

Private equity's low reported correlation with public markets is largely an illusion created by smoothed, infrequent valuations ("volatility laundering"). The effect is exaggerated when institutions report private asset returns with a one-quarter lag, creating "accounting diversification" instead of real risk reduction.

Jeff Gundlach argues private credit's attractive Sharpe ratio is misleading. Assets aren't priced daily, hiding risk. When an asset is finally marked, it can go from a valuation of 100 to zero in weeks, exposing the “low volatility” as a dangerous fallacy.

Howard Marks argues that private credit's apparent low volatility during market downturns is not magic but an accounting feature. By not marking to market daily, it mimics the psychological trick of simply not looking at your public portfolio's value, creating a potentially false sense of security for investors.

Investors are drawn to PE's smooth, bond-like volatility reporting. However, the underlying assets are small, highly indebted companies, which are inherently much riskier than public equities. This mismatch between perceived risk (low) and actual risk (high) creates a major portfolio allocation error.

Harvard's John Coates reveals that 'private' equity funds primarily invest public money from pensions and endowments. The 'private' label is a brilliant marketing strategy that allows them to avoid the public disclosure and scrutiny that should accompany managing millions of workers' savings.