NEW YORK (CNN/Money) - Despite a tough investing environment and mediocre returns, investors in hedge funds say they plan to put more money into those funds, according to a new survey.

The findings, revealed in Deutsche Bank's 2005 Alternative Investment Survey, come at a time when fund managers have faced a difficult investing climate in the wake of lower volatility, increased competition, and many stocks and bonds trading in tight bands. The average hedge fund has returned 1.06 percent for the year-to-date through the end of June, according to the Hennessee Hedge Fund Index. Investors surveyed said they predict hedge funds will return 6 percent to 8 percent this year.

The survey polled 1,000 representatives from 650 different investment firms representing roughly two-thirds of the industry's estimated total assets, which are believed to be around $1 trillion. Funds-of-funds made up 43 percent of the investors surveyed, 15 percent were family offices and high-net-worth individuals, 11 percent were pension funds and 7 percent were endowments and foundations. Banks, corporations, consultants, insurance companies and "other" comprised the remaining 24 percent.

Smaller investors, or those with less than $500 million in assets under management, plan to increase their investment to hedge funds more than do larger investors.

Investors with under $500 million said they want to increase their allocation by 6.26 percent, a number that shrank as assets climbed. Investors with $1 billion to $5 billion want to boost their allocation by 2.52 percent, while investors with more than $5 billion in assets want to boost their allocation by 2.17 percent, the survey found.

But investors also feel their enthusiasm could harm hedge fund returns, with 67 percent of respondents saying they think large inflows of capital into hedge funds could have a negative effect on returns. This belief is even stronger among investors who have been putting money into hedge funds for more than 10 years.

The most popular hedge fund strategy remains long/short equity, which involves hedge fund managers taking a combination of long and short positions in publicly-traded stocks. About 68 percent of investors surveyed are invested in this strategy. Also popular was "event driven", a strategy in which managers anticipate corporate events such as restructurings or mergers.

Investors are also becoming increasingly resistant to longer lock-ups, or the amount of time until they can redeem their money. In 2004, 68 percent of the surveyed investors said they'd only give money to managers with lock-ups of one year or less, but that number spiked to 77 percent in 2005.

That finding comes as some hedge fund managers are considering switching to two-year lockups in order to avoid having to register with the Securities and Exchange Commission when that rule takes effect next year. The SEC is exempting managers with lockups of two or more years, on the grounds that it does not want to include private equity funds in the registration rule. Private equity funds are highly illiquid and typically have lockup periods of at least five years.