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Israel's mutual funds industry is prospering beautifully. In recent weeks mutual fund managers have raised billions from the public, mainly for funds specializing in mixtures of stocks and bonds, which tend to charge very creamy management fees.

"The public is coming back to the stock market," scream the headlines; business is roaring; the owners of the private brokerages are growing rich fast and managers on salary are starting to make millions.

But what are they actually doing with our money? The big institutional investors put most of it into large-cap Tel Aviv stocks and into the main series of bonds, both fixed-income and index-linked.

You'll find that the funds' main holdings are in the big companies on the TA-25 index; the differences lie only in how much exactly they put into each share. But on the margins, they're also choosing all sorts of mini-investments, some of them pretty weird. Here are a few of them.

1. Betting the house

Many of the mutual funds have intriguing positions in online-gambling shares, some bought during the Internet-casino fever of 2006, some newer investments.

Afikim Overseas placed 0.61% of its assets into the Shaked brothers' company 888.com, which is seeking a buyer, so far in vain. Tamir-Fishman's fund Global and Pia's parallel fund put 0.7% of their assets into PartyGaming, the biggest online poker site around.

No less than 14 mutual funds have holdings in Noam Lanir's Empire Online. Altshuler-Shaham has a hefty 2.25% of its assets in that share. Empire Online has meanwhile sold all its gambling operations, changed its name and is now basically a wallet seeking what to do with the money.

2. Nova Star Options

This fund grew much attention for its extraordinary performance. On Sunday units in the fund jumped more than 10%, and this isn't some fly-by-night bit player: it's got more than NIS 30 million in assets. But what is it doing with the money? As of the end of February, it had placed 68% into makam short-term certificates and put all the rest into options strategies.

It actually isn't relevant to analyze how well its strategy with options worked in February: the options expired and Nova is now in a completely different position. But its games haven't done well by investors. The fund lost 46% of its assets from the year's start.

3. The winner

Conversely, the best-performing mutual fund in Israel this year has been Migdal Maof Kiflayim (double Maof), which has returned more than 43%. Its "double" exposure is obtained by buying call options on the TA-25 index (commonly called by its former name, the Maof), while selling put options.

Its gambles have smiled upon Migdal Maof Kiflayim in the last two months, as has its picks of TA-25 stocks.  It put money into Israel Chemicals (TASE:  CHIM) (9%), Teva (TASE, Nasdaq: TEVA)  (9%), Bank Hapoalim (TASE: POLI)  (8%), Bank Leumi (TASE:  LUMI) (7%), and Africa Israel (TASE: AFIL)  (6%), all stocks that beat the benchmark this year.

Africa Israel stock from January 1, 2006

4. The loser

Ilanot Overseas Dollar Aggressive has been one of the biggest letdowns this year, with negative returns of more than 11% from January 1. The entire sector of foreign currency-based mutual funds has done badly this year as the shekel soared against the dollar, but Dollar Aggressive fared worse.

Its biggest gambles were on bonds of General Electric, Unilever, a foreign mortgages bank and of the pharmaceuticals giant Glaxo. In all cases, Dollar Aggressive chose the shortest-term paper and found itself hit by the entire slide of the dollar against the shekel, as well as the weakness of short-term dollar bonds in world markets.

5. "Greenback" energy

The favorite local stocks among the local mutual funds were Teva, and banks Hapoalim and Leumi. Which foreign stocks ignite the managers' imaginations?

The three favorites were Conoco-Philips, which no less than 49 Israeli mutual funds chose; the insurance company AIG; and China Telecom. But out of the 10 top foreign shares, not including Israeli companies listed overseas, five were oil and gas companies.

Green is important, especially in these days of escalating warnings about global warming. Evidently, though, returns matter more.