Investors who rely on high-beta strategies are running far greater risks than they often assume, as global stimulus packages have distorted historical correlations, according to risk consultancy firm CheckRisk.
The Australian stock market has historically had a high correlation with United States and, to a lesser degree, global market indices, but since June 2010 these correlations have broken down.
CheckRisk managing partner Nick Bullman said that was largely due to the quantitative easing programs in the US and Europe.
"Since June or September 2010, the Australian market has decorrelated from the US market," Bullman said.
"The Australian market has decorrelated from some very basic econometric real risk indicators.
"What has happened is that everyone else, except for Australia, has been printing money and it accelerated at that point."
That had far-reaching effects on the behaviour of the domestic stock market, he said.
"What our work involves is measuring the rates of change and the conclusion of this work is that if you are reliant on beta - and there are a lot of fund managers in Australia at the moment who are trying to promote beta-reliant stocks - we would say that is a very high-risk strategy, because the beta does not exist in the market," he said.
That made it much harder to predict how high-beta stocks would react, as historic indicators would not be of much use, he said.
"The stock market is not reacting to normal inputs," he said.
"It is not reacting to sentiment, not reacting to news and not reacting to traditional correlations.
"During the past three years, you were able to rely on markets bailing you out of trouble if you made a mistake, but that is very unlikely to happen now, because these correlations have disappeared.
"Anybody that is going to rely on selling high-beta stocks is at much greater risk then they are willing to imagine."
From a pure risk perspective, the safest strategies involved companies with high dividend yields and strong cash flows, he said.
"What this favours is income-driven strategies. It actually means a much more defensive strategy is better, because you can't rely on the beta of the market at all," he said.
"We think for the moment, the lowest-risk strategy is to be in high cash yield, high dividend yield, cash-flow companies."
CheckRisk produces global risk reports according to a method that uses a wide variety of indicators and measures of the rate of change in this information.
On occasion, the research has thrown up unexpected results.
The company issued a report in December last year on potential risks in 2012.
The report included a section about geopolitical risks, which spoke about Iran's nuclear weapons program and the increasing threat of the assassination of academic and development figures.
Only two weeks later, Iranian nuclear scientist Mostafa Ahmadi Roshan was blown up by a bomb attached to his car.
"Afterwards, clients called us up and asked: 'How did you know that was going to happen?' Of course, we didn't. It was just a possibility that the model picked up," Bullman said.
CheckRisk will launch an Australian-focused service in March, generating an Australian Weekly RAP (Risk Analysis Profile) that highlights risks in the domestic markets.
Bullman said it had a number of commitments from Australian institutional investors.
"Globally, we advise to risk assets of US$8 billion. We hope that by the end of the year that will have increased to US$25 billion," he said.
