The reset decision for segregated fund maturity guarantees

A segregated fund is a mutual fund whose value is protected by a maturity guarantee. An investor in such a fund may have the option of periodically resetting this guarantee to extend its life and increase the guaranteed amount. We model this guarantee reset decision using a discrete time Markov chain and analyse a decision strategy based upon a return threshold. We characterise the optimal value for this threshold and examine its properties. We show that the intuitive strategy of resetting the guarantee whenever the fund’s value has increased is not optimal but seems to provide good results.