Why can hedge funds negotiate such high fees despite lackluster performance? You answered it in the prior sentence: portfolio theory is incredibly robust. They

Why can hedge funds negotiate such high fees despite lackluster performance? You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments. Whether this plays out in practice is a different story, but that's the idea and selling point.