I don't have experience with this specific brake system, but I'm guessing they need to be bled. I've over the years had the same issue with Hopes and Shimanos, and both times a good, patient bleeding did the trick. Any good hydros will allow you to adjust the lever in and still have good power/modulation, assuming you can get this out of the brakes at any lever setting.
Good luck.
In the meantime, I moved the lever adjust out and they are farther away than I would like but they perform perfectly now.
I agree it shouldn't matter where the adjust is set, afterall, that's why the adjust feature is there!
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