Marginal Revolution has a collection of links on the topic.
One argument is that hedge funds are valuable because of their volatility reducing properties and not their ability to create a raw alpha. It's an interesting view point, but in that case, should the fees be based upon the ability to post positive return with low covariance to the market?
In another post, MR links to an article that claims that Hedge Funds have lower return volatility. I'm not entirely convinced about this because hedge funds don't have to post prices continually. If I recall, they often can self report fund values periodically which would serve to smooth their volatility (but I might be wrong on this).