The lack of daily mark-to-market in private assets provides 'volatility laundering.' Institutional allocators are complicit because it protects their careers; smooth, positive returns keep their jobs safe, even if it's an illusion that masks underlying risk. The incentives are aligned to maintain the facade.

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.

Public pensions may invest in private assets not only for potential outperformance but to avoid the daily mark-to-market volatility of public markets. This 'volatility washing' creates an illusion of stability that may not reflect the true economic risks of the underlying assets, serving as a poor reason to invest.

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 assets appear deceptively stable because they are valued infrequently and subjectively, not because they are inherently less risky. This practice, termed 'volatility laundering,' masks true risk by smoothing returns on paper, a critical flaw for investors assessing portfolio diversification and risk-adjusted returns.

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.

Private fund managers often delay marking down portfolio company valuations even when comparable public stocks plummet. This practice, termed "volatility laundering," creates an artificial sense of stability and hides the true level of risk and potential impairment within a fund's portfolio.

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.

Private equity funds report lower volatility because they aren't required to mark assets to market daily. Unlike public funds, they can avoid reporting sharp downturns, a practice critics call "volatility smoothing" or "lying." This creates a misleading picture of risk and return.