Can you set the spirit in the whispering hillock free before meeting the crones, thus saving the orphans, and then later the Baron and Anna live?

I dont think so, since the crones are the ones sending you to kill that spirit. It's up to you to decide whether to kill it or let it live. I'm guessing though, Anna's, the Baron, and childrens future depends on that choice. I made mine, and was quite bummed out about it, oh well.

I have read either in this forum or in the CD Projekt Red forum, that someone has done it that way. They found the spirit first, freed it and had the Baron and Anna live later on. But it may be a bug, I have had a few quests mention things I didn't do previously, or mention the opposite of what I did in later stages of the quest lines.

I have never tried it myself so cannot confirm.

... guess not:

if you did not visit the crones first, you would not find the being at the hillock.
Part of a quest, so the different events are kind of "chained" (get to "2" only if you had been at "1", and so forth).

Linear in this respect.

i was on an big exploration tour. i found her long before i got the quest and freed her. it's possible. if you near her, you hear her whispering voice. follow that voice and you will find her and can save her.

Yes, you can. I have done exactly this in my current play-through.

Doing it this way does the town folk still get murdered by the tree spirit?
I happened along to the Crones before the tree spirit... so Anna and the Baron now are both gone.

yes.

It's not a bug, it's a choice. The game is not on rails.

Ok, but: does this make any sense?

if you look at the situation:

- you look for Ciri
- you've got clues that you might find some lead in this swamp
- you finally get the job from the crones and take it because you need some answers about Ciri
- the answers will be coming from the crones once you did the job.

Now, if you break this chain of events by starting with the monster at the hillock, the quest must be seen as solved, even if you had not been aware that there is a quest at all.
If this happens this way - ok.
But if the folks around still get killed (by the monster that you just had finished), then the whole case becomes pretty weird, no logic with this.

The trapped spirit is the mother of the crones.

Now look at this alternative situation:

- you look for Ciri
- following leads, on your way to the swamp, you happen upon a strange tree with voices; you investigate
- the spirit tells you of the crones, and how they feast on human children, and hear all through human ears. They cursed the druid because she stood in their way to rule everything.
- the spirit says it will save the children
- you already know that the crones have harmed Ciri

The people in the village are not harmed until after the quest -- it plays out as before, with the crones still giving you a task (you don't have the option to tell them the spirit is free until afterwards).

Well I'm going to try going to the hill first, and see what happens. I will post about it here if it works out.

It worked, go to the whispering hillock first (without doing the Ladies of the Woods quest), and free the spirit.
Everything will play out like normal for "the ladies of the woods" quest, however after you speak to the village elder and return to the crones, the kids will be gone and the crones will tell Anna "It was not your fault you did your job well, the kids were plump, they were going to be as sweet as caramel..." Then you can tell the crones that you freed the spirit before even meeting them, they will get pissed that you outsmarted them, then they will tell you about Ciri. When you do the return mission, Anna is crazy, not a water hag, the Baron vows to his daughter that he will look after his wife, and after he has seen the hermit in the Blue Mountains, he will return to his daughter. This must be a secret ending to that storyline, it is actually scripted, so it cannot be a bug.

I think this works fine in the narrative, it just means that Geralt happened across the tree spirit before meeting the crones. The crones give you the same mission (to speak to the Village Elder, you tell him you already dealt with the tree), the difference is that they end up not blaming Anna for the kids escaping.