WARRANTS. PRIVATE EQUITY. Even puts, calls and other fancy derivatives. If you haven t looked into what your mutual fund is doing with your money lately, you may be in for a few surprises.

In this difficult market, a growing number of mutual fund managers have been quietly reaching beyond stocks, bonds and cash to invest in some more-exotic vehicles. It s done, of course, to juice returns and in some cases it has worked. But for every new payoff, there s a new risk. There are a lot of crafty new instruments out there, says Jeff Tjornehoj, an analyst with fund tracker Lipper. You hope your manager isn t involved in something he or she doesn t understand.

Managers say they re aboveboard with their investment choices so long as you read the fine print. Case in point: John Osterweis, manager of the Osterweis Fund, recently invested more than 3 percent of the $327 million fund in a special purpose acquisition company a little-known investment similar to a blind trust managed by billionaire investor Nelson Peltz. These SPACs are unconventional, and fees can be high. But Osterweis sees it as a defensive move; the fund is down 26 percent in the past 12 months, 7 percentage points less than the decline in the broader market. And, he says, thanks to the fund s flexible charter, he s within his rights to buy these kinds of investments. We wrote our prospectus with the broadest mandate possible, says Osterweis. It s more honest and less inhibiting.

Similarly, Firsthand Technology Value fund may seem at first glance like a run-of-the-mill sector fund with blue-chip names like Cisco Systems and Intel in its portfolio. But more than 20 percent of the $260 million fund was recently tied up in sophisticated and esoteric vehicles like warrants, venture capital and private equity thinly traded investments with plenty of upside and plenty of risk. Do shareholders know? Only if they dig into the prospectus which allows for this kind of investing or regularly track the fund s holdings. The bottom line is easier to spot: The fund is down almost 38 percent from a year ago. (Firsthand says it simply looks for the best opportunities.)

Some analysts argue that there s reason to allow fund managers this kind of freedom. If you re paying for active management, says Morningstar Director of Personal Finance Christine Benz, you want something that doesn t look like an index. That s certainly been the case at CGM Realty, a real estate fund that has a full third of its assets in industrial-materials firms. Through 2007, it had five years of returns greater than 25 percent, but in the last 12 months it s down nearly 35 percent.