Well, I didn't killed redcaps reventively because, well, I don't have habit of attacking non-hostile npc/mobs just because i see them
I wonder where did you get that ...
Actualy what happened was that my character succed in Nature(i believe?) check and realized that all around her is just ilusion ... then i told it to Redcaps, bcs i had no desire to play at sheeps with them ... then they started to threaten me ... and when i bothered then enough (talked to each of them) they simply had enough of it and attacked me instead.
So, as i said ... the result was that i allready killed recaps ... everything else are your own false presumptions.

And result of THAT was when i entered the house i was not coming to "smiling old lady in her cute house in the woods" ... but i allready known, that this woman who just few minutes ago teleported away in green cloud of smoke lives in poisonous swamp, surounded by murderous sadistic fae creatures ...
And in the lair... yes, you start on high ground, and with -1 turn, 3 hags and bunch of debuffs
And just in next turn you reduce their numbers back to 1, if you either have caster or are willing to use scrolls with your non-caster character.

Was only manages to kill her with "move one character in sneak until you will see hag through stealth, put silence, then move other characters in sneak into battle one by one" guide.
Im not sure if i would call anything that encourages abusing exploits a "guide". :-/
Wanna my advice?

Ethel clones dissapear after first damage they recedive ...
So either use AoE spells, or multitarget spells ...
My personal favourite for this fight are
Magic Missiles, bcs they never miss as long as they even can be casted on target ... Magic Missiles level 2 > 4 missiles > 4 targets > 1 Hag left.

Works like a charm.

All that "one character is frozen in battle/dialog and others can run around and do what they want as long as they want" stuff just feels very wrong for me...

Yup, thats bcs its simple exploit.

But thats not what im talking about ...
You know, you can in most situation position your party before you even start talking ... from roleplay perspective you can call it "just in case" ...
Sure, sometimes its easier like Grymforge, or GIthyanki fights ... sometimes it is impossible, like in boat fight ...
But its allways usefull.

Of course, majority of players will want to experience the story content, so it is not good if that results in worse combat experience.
I believe they can ...
There is only one character who can speak anyway ... even tho i admit that if you are playing Sorcerer, or Wizard, you send your Tav into much greater danger to talk ... compared to Barbarian Tav for example.

But just the fact that in nearby bush Rogue with prepared bow is awaiting first sign of battle doesnt mean at all, that you "cant enjoy story". O_o
I don’t remember that encounter being too challenging, except the constant danger of being one-shot to death with shove due to nearness of lava and death pits on almost all sides of the arena.
Honestly, me neither ... it is one of the more tedious, that much is certainly true ...
But nothing earthshaking.
It even seemed funny to me when i was there, that it felt much easier than Githyanki battle, while there is much more Duergars, and they all also have level 5!
There is certainly several ways to make this game a lot thougher for yourself tho ...
So without any futher details, who can tell what caused this difficiulty? :-/