Segregated funds are variable annuity products sold by Canadian Insurance companies. Essentially, these products allow investors to participate in the stock market upside, while providing a downside guarantee. Typically, these guarantees are sold as a "rider" on a mutual fund held within a pension plan.
Here is a quote from a paper we wrote in 2002 ( H. Windcliff, P.A. Forsyth, M.K. Le Roux, K.R. Vetzal, ``Understanding the behaviour and hedging of segregated funds offering the reset feature,'' North American Actuarial J., 6 (2002) 107-125.)
If one adopts the no-arbitrage perspective...in many cases these contracts appear to be significantly underpriced, in the sense that the current deferred fees being charged are insufficient to establish a dynamic hedge for providing the guarantee. This is particularly true for cases where the underlying asset has relatively high volatility. This finding might raise concerns at institutions writing such contracts.
We held a workshop on this topic in Toronto (