Brad-

Ah, another hater of off-market investment activity. Clearly only an investment observed in the dysfunctional, flash crash, hedge fund driven liquid markets have any real meaning. Level 3, how pejorative. Frankly I'll take it all day long.

As a case study, take the NAREIT and NCREIF real estate return indexes. The former represents traded interests and the former represents institutionally held (non-traded) interests. You will not that while your observation of "temporal diversification" is at play here, overall volatility is clearly reduced due to the elimination of behaviorial finance induced volatilty. With reduced vol, the return-risk ratio is much higher for non-traded real estate, and thus clearly preferred for any rational investor.