Volatility laundering

Volatility laundering — Cliff Asness’s term for the way infrequent, appraisal-based marks on illiquid assets make their returns look far smoother than economic reality (fiscal-year-only reporting understates true drawdowns roughly 2×). The smoothness is a reporting artifact, not an investment property — and retail endowment-style products sell that artifact as “low volatility.” The self-audit version: mark your own business daily through its worst quarter, on paper, and meet the volatility you never had to look at.

First used in: 5.4 · The endowment model, honestly