Big money is working its way into small places.

Deep-pocketed pension funds, endowments and other institutional investors are pouring money into a place they?ve avoided for years: emerging-market hedge funds.

In December, the California Public Employees? Retirement System, or Calpers, allocated $100 million of its $206 billion to Vision Investment Management, a Hong Kong firm that invests in hedge funds specialising in Asian emerging markets. The University of Texas endowment and pension funds for state employees in New Jersey and Pennsylvania, two of the biggest in the US, also have allocated millions to emerging-market hedge funds in the past year.

The move is part of a shift in the fortunes of emerging economies. But the risk of economic instability has grown as more cash wielded by fast-trading hedge funds moves into these often-fragile markets.

The net amount of money flowing into hedge funds that focus on emerging-market investments rose 13 percent to $5.3 billion in 2005 from $4.7 billion in 2004, bringing total assets to $44.5 billion, according to Chicago-based Hedge Fund Research Inc. The firm?s HFRI Emerging Markets Index last year jumped 21 percent, compared with a 3 percent gain by the Standard & Poor?s 500-stock index.

The increase came as markets from Brazil to China thrived during a boom in commodities prices. It marked a sharp turnaround from 2002, when total assets in emerging-market hedge funds plunged by $5.7 billion on the heels of the Sept. 11, 2001, terrorist attacks and a recession in the US.

?Just about any institution you talk to wants some emerging-market hedge-fund exposure,? says Gary Kleiman of Kleiman International Consultants, a New York researcher of emerging markets.

While the investments are a fraction of the funds and endowments? overall assets, the pace of cash flowing into emerging markets is quickening. So far in 2006, investors have put more than $20 billion into a basket of emerging-market stock funds ? ten percent of which are hedge funds ? tracked by Emerging Portfolio Fund Research, a Boston outfit. About $20.3 billion flowed into the basket in all of 2005. Roughly 70 percent of the money it tracks comes from institutional investors, says Brad Durham, a managing director.

One obstacle to more institutional money flowing into emerging-market hedge funds: There aren?t enough funds.

?The supply isn?t constrained by the assets in the markets, but by the available number of money managers,? says Tanya Styblo Beder, chief executive of Tribeca Global Management, a Citigroup hedge fund that invests some of its money in emerging markets. ?It?s just a question of the infrastructure getting into place.?

The infrastructure is growing quickly, though. There are nearly 600 Asia-dedicated hedge funds with nearly $100 billion under management, up from 100 funds with $15 billion under management four years ago, according to James Chen, operating chief at Vision Investment Management. A January report from Greenwich Associates, a financial-consulting firm based in Greenwich, Connecticut, said that Asia-focused hedge funds in 2005 comprised about 30 percent of commission-generating stock trades in the region.

Institutional investors have pursued emerging-market stocks for years, mostly through emerging-market-stock mutual funds, which have returned an average an 42 percent a year over the past three years, according to fund researcher Lipper Inc. More than $17 billion flowed into those funds from 2003 to 2005, bringing total assets just north of $110 billion.

Now, institutions are seeking out hedge funds to gain exposure to more unusual corners of these far-flung markets, including debt securities, commodities and currencies. Since the stock markets of such countries are often small, hedge funds are targeting areas such as real estate, private companies and debt, says Ms Beder.

Yet many institutional investors remain cautious. The meltdown in the late 1990s that spread across markets such as Thailand and Russia and helped take down one massive hedge fund, Long Term Capital Management, is difficult for investors managing these often slow-moving retirement funds to forget.

Harvey Sawikian, co-manager of the $2.3 billion Firebird Funds, based in New York, has about 95 percent of its money in emerging markets such as Bulgaria, Romania and Russia. Institutional investors are stepping up their interest, he says, but many ?got burned in 1998 and they still haven?t quite been able to put that behind them.?

New Mexico?s $13 billion pension fund allocated about $1 billion to hedge funds in late 2005 but decided against investing in emerging markets, which are ?a little riskier than we?re looking to venture into at this point,? says Charles Wollmann, spokesman for the fund. Sceptics question whether emerging markets can easily absorb the flood of cash.

?There?s an awful lot of money flowing in, but people aren?t accurately assessing what the risks are,? says Kristin Forbes, associate professor of economics at the Massachusetts Institute of Technology?s Sloan School of Management.

One of the biggest risks: New investors ? untested in these often-volatile economies ? could start demanding money back from funds during sharp downturns. That means a painful slide in one region could spread, as funds are forced to sell holdings in unaffected markets to meet redemption requests.

Jerome Booth, head of research at Ashmore Investment Management, a London money manager with $17 billion invested in emerging-market debt, dismisses the possibility of a 1990s-style downturn. He says that was the result of too many hedge funds loading up on borrowed money to invest. ?We don?t have a bunch of leveraged investors; we have pension-fund investors? who are sophisticated enough to wait out any short-term disruption.

In April, the International Monetary Fund will release its semi-annual Global Financial Stability Report, which will focus on the rising flow of institutional money into emerging markets.

One conclusion: The added funds are helping emerging economies restructure their national debt in ways that should make them less vulnerable to financial shocks, says Ceyla Pazarbasioglu, division chief of the IMF?s Emerging Markets Surveillance Division.