Abstract: Private equity fund managers, pension fund managers, and investment advisers assert that private equity investments diversify portfolios. I show that traditional methods of valuation understate the systematic risk (beta) of private equity, creating an illusion of diversification. New valuation practices reveal greater correlation between private equity returns and those of public equity markets. Moreover, after considering the lagged pricing of private equity assets, private equity fund abnormal returns (alpha) vanishes. Data on market participants that manage over $2 trillion in portfolio assets provide suggestive evidence that the revised fair–value standards implemented in 2006 improve the accuracy of capital markets’ assumptions about mean–variance optimization. In addition, after this change in fair value accounting, private equity firms encounter higher — not lower — costs when accessing capital, a finding at odds with public–market research.