When private equity firms present their track records to investors, the charts often look too good to be true — higher returns with lower volatility than public markets. As it turns out, they often are too good to be true.

Investors considering private equity allocations are frequently presented with compelling performance charts showing that adding private equity will improve portfolio efficiency, as it has provided higher returns with less volatility than public market equivalents — a seemingly perfect investment proposition.

But a critical issue is lurking beneath these smooth return curves: volatility laundering.

Volatility laundering, a term coined by AQR’s Cliff Asness, describes how private equity funds systematically understate the actual risk in their investments.

In public markets, stock prices update continuously throughout trading hours, reflecting every shift in market sentiment, economic news and investor emotion. This constant price d