Ronald Egalka . "Just recently risk has again become a four-letter word, and people are not quite as sanguine about the market looking forward," Mr. Egalka says.

Credit-default swaps. One of the fastest-growing types of derivatives, the credit-default swap, is rapidly gaining fans among bond-fund managers. A credit-default swap is essentially a form of insurance against a company or country defaulting on debt. The swap buyer typically pays a quarterly fee to the seller, and the seller agrees to make a payment to the swap buyer in the event of a default. A significant market in the swaps has existed for less than 10 years.

Many fund managers like credit-default swaps because they can be easier and cheaper to trade than regular corporate bonds and offer an easy way to add or subtract credit risk. Several AIM bond funds, including AIM Income and AIM Total Return Bond, recently used CDSs for the first time, buying a CDS index that includes 125 corporate bonds. The Federated Real Return Bond Fund, launched late last year, can invest up to 80% of assets in CDSs.

But as the CDS market has exploded, many questions have been raised about their risks. The swaps, which typically don't trade on an exchange, are often simply agreements between a fund and a Wall Street firm. In late 2005, as CDS trading accelerated, regulators met with major Wall Street dealers to discuss backlogs of unconfirmed trades and other problems in the credit derivatives market.

Funds must also be concerned with the possibility that the banks selling the swaps won't be able hold up their end of the deal. And questions have also been raised about market manipulation. A 2005 study by researchers at the London Business School found evidence of possible insider trading in CDSs. Timothy Johnson , a co-author of the study who is now an associate finance professor at University of Illinois at Urbana-Champaign, says the market is still "the wild west."

The instruments raise questions for some fund managers. In a commentary posted on its Web site in December, bond-fund giant Pimco noted, "Innovation is a wonderful thing, but it can also lead to excesses that separate asset prices from their underlying value, whether we are talking about houses, corporate bonds, credit-default swaps or pets.com."

Tracking indexes. Many funds use derivatives to track a market index. Some, like Pimco StocksPlus, are relatively conservative. The fund aims to outperform the S&P 500 by investing a small slice of the portfolio in index derivatives contracts and the bulk of assets in bonds. But many new index-focused funds are more exotic -- using derivatives to double index returns or to track commodity prices. And many of these funds are difficult to use properly in a portfolio, analysts say.

The U.S. Oil Fund, launched early last year, aims to track changes in the price of West Texas Intermediate light, sweet crude oil, as measured by changes in the price of oil futures contracts. But oil futures contracts can behave quite differently than the actual price of oil. In the first three months of this year, the fund was up 3.4%, while West Texas Intermediate crude oil was up nearly 8%. Manager Nicholas Gerber says the fund is "doing a great job" of tracking its benchmark futures contract. Since the U.S. Oil Fund is structured as a limited partnership, not a mutual fund, investors receive a K-1 partnership income tax form, which can complicate individual investors' tax returns.

Recent market conditions have highlighted the risks of leveraged index funds, which often use derivatives to magnify the performance of a market index. The Direxion S&P 500 Bull 2.5x Fund, for example, uses derivatives as part of its strategy to deliver 250% of the daily performance of the S&P 500, before fees. During the market downturn of Feb. 27, when the S&P fell about 3.5%, the fund fell nearly 9%.

And because of the way leverage compounds over time, investors can't always expect a fund that aims to double index returns on a daily basis to double the index returns over the long haul. ProFund Advisors LLC, a company that manages leveraged index funds, warns investors on its Web site, "returns for periods longer than one day often do not reflect the daily investment objective."

Reginald Laing , an analyst at investment-research firm Morningstar Inc., calls the funds "a fairly gimmicky idea" that "doesn't make sense for the vast majority of investors."