In a heavy skillet, saute tarragon, red wine vinegar, and diced shallot over medium heat for 10 to 15 minutes, or until the mixture becomes paste-like. Remove from heat.
Combine egg yolks, 1/8 cup hot water, lemon juice, salt and pepper in the top of a double boiler set over simmering water. Cook and stir until the mixture reaches the consistency of mayonnaise. Remove the mixture from heat. Add the melted butter slowly, stirring continuously. If the mixture becomes too thick, thin with the remaining 1/8 cup of hot water. Add the tarragon, wine, vinegar, and shallot mixture and blend well.