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Russell's report recommends liability surrogates as a "partial" alternative to traditional hedging. The report cited certain sub-classes of property, such as long-lease property, ground rents and social housing, as well as mature infrastructure assets. Under a liability surrogates strategy, the reduction in volatility relative to liabilities is achieved by investing in assets for which a large portion of the return is derived from income, as opposed to capital gains.
The report noted that, "ideally", a portion of the income should also be secured in the form of contractual rights. It added: "In risk terms, the high income component should reduce the volatility of these assets in absolute terms, while any broad match of income with liability cash flows should reduce funding level volatility". "In return terms, the existence of an attractive and secure spread versus index-linked sovereign debt of the same maturity should help to outperform inflation-linked liabilities over the long term while also keeping up with inflation.
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