Bold statements to make, but I must respectfully disagree with a few points.
First off, to assume that all investors are looking for are high returns as presented in the first graph shows a misinterpretation of the purpose of an alternative source of returns for diversification within a portfolio. Granted many hedge funds (by design) are highly correlated to equity markets, but to paint them all with the same brush is incorrect; think of the purpose of an equity market neutral fund with a beta of zero and expected return of 5-10% in a portfolio for instance.
Secondly I agree that biases exist within hedge funds indices, but an index such as HFRX is investable so if that is your worry then why not just invest in the index?
The third and final point I would like to point out is your interpretation of 50% of a distribution being on either side of the "average". "Mathematically speaking" it is actually very easy for more than 50% of people to be above average when there is skewness in a distribution - a point you raise in the next paragraph. For example the average of (90,90,90,90,0) is 72 so in this case 80% are above average.
It may be the case that hedge fund selection within a portfolio of traditional assets is a challenging task for a traditional team, but there are multiple options out there in the form of investable indices for exposure to the HF industry as whole or lower cost FOHF managers for selective exposures that can overcome this burden.