Exactly. This is the real problem here, not the fairness of the fee structure. There is vanishingly little "small dollar" money in these funds. The median investor dollar in a hedge fund is a big player, and expected to be sophisticated about these things and to understand how the risks work.
The harm is to the market as a whole, not the poor investors who get hurt in a down market.
Yes there is. Volatility is an inefficiency, by definition. Efficient markets seek to the correct market price and stay there. A "volatile" market is one where parasites (c.f. hedge fund maniacs) siphon off capital due to games like this.
The harm is to the market as a whole, not the poor investors who get hurt in a down market.