Instead, the shares have rallied about 40 per cent.

Bets against large Australian companies by hedge fund managers including Hurwitz, of SC Fundamental LLC, are coinciding with an increase in investments from local pensioners with $557 billion in self-managed funds. The retirees, who often overlook traditional measures of valuation in favour of big dividends and familiar names, pumped more than $8 billion into the sharemarket in the year to June 30, 2013, about 65 per cent more than in 2010, according to Credit Suisse Group AG.

''They are the army,'' said Hasan Tevfik, director of Australian equities research at the Zurich-based bank. ''They are the dominant force in the equity markets now. Investors don't understand who's actually driving share prices.''

Professional investors should avoid shorting the stocks the retirees favour, including Australia's four largest banks and former state phone company Telstra, according to Tevfik. Short sellers bet that a stock will decline, borrowing shares to sell with the expectation of buying them back later at a lower price.

Dissatisfied with the fees charged by professional managers, Australian retirement savers have boosted the assets held in so-called self-managed superannuation funds fourfold since 2004. SMSFs are unique among pensions in developed nations in that they choose their investments, are responsible for custody arrangements and for keeping records. They can invest in assets including stocks, bonds, cash deposits, property, art and wine.

Such funds are expected to oversee $2.2 trillion by 2033, according to a Deloitte Touche Tohmatsu report last year. Australia's entire sharemarket is worth $1.3 trillion.

''The self-managed super funds just load up and load up'' on shares in Australia's big four banks, John Hempton, chief investment officer of Sydney-based hedge fund Bronte Capital Management, said. ''This market is insanely expensive.''

Commonwealth Bank, Westpac, ANZ and NAB, which contributed the most to a five-year rally in the nation's stocks, trade at an average of twice the value of their net assets, according to data compiled by Bloomberg. That compares with a median multiple of 1.2 on the Bloomberg World Banks Index.

Hurwitz, a partner at New York-based hedge fund SC Fundamental, said Commonwealth Bank's recent decline - the lender posted a 6.9 per cent drop last quarter, the most in three years - is ''just noise''.

''It certainly hasn't been a great short thus far, but the shares are trading well in excess of double what we consider current fair value,'' he said. ''It is certainly possible fair value could fall significantly.''

For Olivia Engel, State Street's Sydney-based head of Asia-Pacific active quantitative equity, the valuations are a reason not to buy.

Engel said the four lenders, which make up about 30 per cent of the benchmark S&P/ASX 200 Index, represent only about 7 per cent of State Street's Managed Volatility Alpha Fund. She is confident they will eventually come down to earth.

''Over the years I've witnessed a few periods in history where people have questioned whether historic measures of valuation apply, because valuations they're seeing defy gravity,'' she said. Such logic has always turned out to be misplaced, she said, citing the tech bubble as an example.

For retirees dividends take precedence over valuation, said Boris Pogos, 59, who manages his own pension fund.

''Dividend yield is really important in my stock selection,'' said Pogos, a Melbourne-based independent investment analyst who has run a self-managed pension fund for 16 years and has 80 per cent of his portfolio in equities. ''For people who want to live off the income rather than the capital, the high-dividend yield reduces the need to sell stocks.''

Among global stocks boasting at least $10 billion in market value, Australian companies tie with Macau for the highest average forward dividend yield after the Netherlands at 4.4 per cent, according to Bloomberg data. The big four lenders and Telstra offer an average yield of 5.6 per cent, the data show.

That compares with a yield of 3.36 per cent on benchmark 10-year Australian government bonds.

Fund managers need to take into account changes in the composition and behaviour of fellow investors, said Aswath Damodaran, who focuses on equity valuation as a professor of finance at New York University's Stern School of Business.

''These retirement funds have longer time horizons and preferences for larger dividend paying stocks than the rest of the market,'' he said.

''The old metrics, applied lazily and as rules of thumb, will yield the conclusion that these stocks are overpriced. If you believe that the fund flows have changed, you have to find a way to bring it into your analysis.''

Bloomberg