Institutional investors may be tilting away from risky assets just as equity markets across the world are hitting record highs.

If correct, it may bode badly for future equity gains and make markets particularly vulnerable to sudden shocks.

Flow data from both financial services firm State Street and fund tracker EPFR Global suggest that long-term investors, many of whom bought into the market turbulence of August, are less bullish than actual market moves would imply.

State Street says moves within the $13 trillion of portfolio money it administers as custodian have entered a risk category it calls the riot point regime.

It is the most risk averse of its five risk regimes and implies a broad-based retrenchment from equities.

Furthermore, the pattern of flows that took investors to this point included eight trading days following the Federal Reserve's surprise 50 basis point interest rate cut on September 18. That cut was otherwise a major impetus to stock markets.

The picture at EPFR Global, which tracks funds with a total of $10 trillion in assets, is only slightly different.

Although funds continued to move into supposedly riskier emerging market equity funds in the latest week -- with more than $5 billion in net inflows -- EPFR says U.S. equity, money market and sector flow data all pointed to an increase in risk aversion.

Money flowed out of small and mid-cap stocks into less risky caps, for example. European and Japanese equity funds also remained under pressure in flows despite good performances, the tracker said.

Amazing, then, that MSCI's main world index, its emerging market counterpart, its Asia ex Japan index, the Dow Jones industrial average and S&P 500 have all been hitting record peaks.

DIFFERENT DRUMMER

All this might seem contradictory, but there are explanations. Long-term investors, for one thing, tend to work in markets differently from their more speculative short-term counterparts.

In August and September, for example, they held on to their equity holdings and took advantage of falls to buy more as markets generally rocked over worries about a credit crunch.

Now, some of them may be reacting to what markets have actually done.

Some large institutional investors such as pension funds have become more risk averse, said Haydn Davies, chief economist at Barclays Global Investors. They have seen more volatility in their portfolio than they had expected.

He also noted that money market funds have been hit hard in the recent credit crisis, adding to the volatility faced by large investors who prefer stability and are required to limit risk.

Many may also be becoming more conservative as they head into the last quarter of the year, hoping to lock in gains and avoid nasty, last-minute surprises.

AXA Investment Managers, for example, said last week it was cutting back on equities -- moving to neutral -- in favor of cash because of the uncertainty about the immediate outlook.

If many more large investors like AXA get more risk averse it likely will weigh on equity gains. But will not necessarily undermine them.

Various allocation polls and anecdotal evidence from strategy notes suggest that equities remain the asset of choice -- AXA after all is still at neutral. And there is no sign that bonds are benefiting from the mood.

EPFR noted that net outflows from the global bond fund it tracks continued in the latest week and have now reached $4.58 billion over the past nine weeks.

But the EPFR and State Street data may well raise an eyebrow in markets.

The bulls should not be sleeping easy, State Street said.

Japan Investment