* Portfolio investors' share of EM debt has doubled to

80% in past 20 years, IMF says

* Sudden outflows could trigger sharp currency drops and

widen sovereign spreads, IMF cautions

* Fund urges stronger institutions, higher reserves, and

sustainable debt to mitigate volatility risks

By Libby George

LONDON, April 7 (Reuters) - Emerging market nations now

get the bulk of their foreign financing from the likes of hedge

funds, pension funds and insurers, leaving them vulnerable to

rapid outflows during crises, the International Monetary Fund

said in a report.

The share of the cash flowing into emerging market debt from

portfolio investors has doubled over the past 20 years to 80%,

the report found, as banks backed away from lending following

the 2008 financial crisis. Since then, emerging markets have

received cumulative inflows of close to $4 trillion, according

to the report.

In a chapter of its Global Financial Stability report

released on Tuesday, the IMF said this source of money

"significantly benefits emerging markets", as ample global

liquidity had allowed them to raise money with longer-term and

lower-cost debt.

However, it also warned that portfolio investors had become

even more skittish since 2008-and prone to pull their cash

quickly when global financial conditions shift.

Countries and companies relying on them are "particularly

vulnerable to global financial shocks", the report said.

Hedge funds and investment funds were far more reactive to

risk than other portfolio investors, it noted, and warned that

the risks were amplified in emerging nations with shallower

financial markets and more limited policy capacity.

"A sudden drop in these flows could intensify external

financing pressures, widen corporate and sovereign spreads,

and trigger sharp currency depreciations."

The IMF estimated that external portfolio debt liabilities

averaged about 15% of gross domestic product in emerging

markets. Portfolio equity liabilities averaged around 7% of GDP,

but "represent an economically meaningful share of stock market

capitalization in some emerging markets."

Foreign portfolio holdings are particularly large for the

likes of Hungary's forint currency, which propelled it to 20%

gains against the U.S. dollar last year.

The forint has wilted since the Iran war began in late

February, with money flows into emerging markets falling after

more than a year of stellar performance.

The IMF added that cross-border private credit and

stablecoin flows into emerging markets were also "expanding

rapidly", with the latter closely tied to crypto market

dynamics.

In order to limit the outflows of portfolio funds, the Fund

urged countries to improve institutional quality, build better

buffers such as foreign exchange reserves and ensure public debt

remains sustainable.