Ten years ago pension funds, along with life insurance companies probably the nation's most conservative investors, were selling their corporate bonds in order to buy common stocks.

Today those same private pension funds, which control $220 billion in assests, are getting rid of common stocks. They are buying short-term securities like Treasury bills, which today pay interest rates in excess of 12 percent.

"It's a performance derby," said Victor Melone, senior vice president and chief investment officer at Manufacturers Hanover Trust Co., which manages $12.5 billion in pension fund assets.

"If you can get 12 to 13 percent in a riskless investment like a Treasury bill, then you'd have to get 18 to 20 percent out of common stocks."

In 1972, according to George W. Connell, a first vice president at Drexell Burnham Lambert, 74 percent of the average pension funds assets were in common stocks. Today, only 52 percent of pension fund portfolios are in stocks.

That is not to say that pension funds plan to go back to the 1950s, when only 16 percent of their assets were tied up in riskier common stocks while most of the rest in safe, interest-assured corporate bonds.

Companies are plowing large amounts of their assets into investments such as Treasury bills for two reasons: (a) To earn a high rate of interest; (b) to have large amounts of cash around to plunge into the stock market if common stock prices should begin to soar as they did in the late 1960s and early 1970s.

Managing pension funds is one of the most competitive jobs in modern finance. Most pension fund trustees are constantly comparing the performance of say Drexel, Burnham with that of Manufacturers Hanover.

As a result, managers are constantly looking over their shoulders to ensure that the current rate of return they are earning for their clients is equivalent to what other pension fund managers are garnering.

"Pension funds are risk averse," said one manager. "That means that even if I think stocks are a good buy right now, I dare not convert too much of current income into stock purchases because it might take six months for stock prices to rise.

"In the meantime, I've got to explain why I'm earning a percent less than someone else," he said.

That type of behavior has led pension funds to herd behavior.

Several months ago, when the stock market experienced a mini-boom, institutional managers jumped on the bandwagon, fearful of getting left out of a prolonged rally. That type of behavior can reinforce a rally and push stock prices higher than justified by conditions.

Similarly, when stock prices start to fall, institutions such as pension funds can make the decline worse than it otherwise would be by selling off their big stock holdings.

For the most part, pension funds have adopted a wait-and-see attitude for several years.

In 1972, they not only plowed all of their income back into the stock market, they sold off bonds to come up with additional funds to buy stocks. According to Drexel Burnham's Connell, 105 percent of pension fund income that year went into common stock purchases.

Last year, only 9 percent of pension fund income went to stocks, while 56 percent went to corporate bonds and 21 percent went into short-term money market investments like Treasury bills.

Traditionally, pension fund trustees have been concerned with the rate of return the manager could garner, although trustees also set other conditions within which the manager must operate. Sometimes managers are forbidden to buy foreign stocks, or to put more than 5 percent of a funds assets into a particular industry.

Now, however, some trustees are beginning to set down "social" criteria for investment.

Drexel Burnham announced that it has set up a special investment fund for money from the International Association of Machinists and the International Molder and Allied Workers Unions.

The new fund will use "traditional investment criteria," but will then add another screening to weed out stocks of companies that are anti-union, have major equal employment opportunity violations, are cited for environmental violations or do business with South Africa.