The recent Market Internal Insight from UBS S&T highlighted the unwind of risk parity funds, which has been under pressure to deleverage due to rising volatility and correlation across asset classes. However, history suggests that a strong recovery month may follow such an extreme unwind.

Risk parity funds typically invest across asset classes with roughly equal risk contribution from each class, using both volatility and correlation to determine the relative dollar weight in each asset class. These funds manage their leverages based on a portfolio volatility target, with 7.5% being the most common target. When volatility and correlation kept rising, as seen in March 2026, risk parity funds were under pressure to deleverage, resulting in a cross-asset unwind in 12 of 21 days so far this month.

As of March 30, the UBS Risk Parity Model was down 5.8%, which is rare as it has only happened five times since 2008, with at least 9 unwind days and a model return lost more than 5% but less than 10% in a month. Historically, after such an extreme unwind, the market took a pause the following month, with the risk parity model rising in four of five subsequent months, averaging a gain of 2.8%. The only negative month was a decline of 0.2%.

While the current situation is unique and unpredictable, history suggests that investors may benefit from a wait-and-see approach, rather than panicking and making impulsive decisions based on short-term market movements. It’s important to remember that risk parity funds are designed to manage risk, and their unwind is a natural response to extreme market conditions. As the market stabilizes, these funds may recover lost ground and provide a strong recovery in the following months.