For the third straight week, emerging market equity funds absorbed more than $5 billion in net inflows in the second week of October as investors continued to bail out of underperforming developed market asset classes, according to data provider EPFR Global.

Investors have poured $23.9 billion in emerging markets since the fourth week of August.

Among emerging market funds, Asia ex-Japan portfolios took in the most cash last week, with diversified global emerging market portfolios a close second.

ôInvestors and institutional sources of capital appear to agree with leading equity strategists who think the liquidity injected into global markets by the FedÆs September rate cut will benefit emerging markets,ö says Massachusetts-based EPFR global managing director Brad Durham.

The US Federal Reserve cut its federal funds target rate last month by 50 basis points to 4.75% in a bid to help ease the US credit crisis. The latest US Fed rate cut was the first from the Fed after it kept rates steady for nine straight meetings since August 2006.

Although the inflows to emerging market funds seem positive on the surface, Durham notes there are reasons to sound the alarm.

ôThe strength of the flows and the speed of the re-rating of emerging market equities over the past three weeks are somewhat troubling,ö he says.

EPFR global analyst Cameron Brandt says recent market performance and fund flow numbers look like they are outstripping fundamentals.

ôDuring the last big run, between October 2006 and February 2007, it took 20 weeks for the funds we track to gain around 23%. That run ended with $9.5 billion flowing out over two weeks and 7% being shaved off year-to-date performance,ö Brandt says.

At the country level, China, greater China and Hong Kong funds continued their strong run, taking in a combined $1 billion in net inflows and making up 47% of all flows into Asia ex-Japan equity funds.