In a heavy medium saucepan combine sugar and water; bring to boiling. Remove from heat. Gradually stir about half of the sugar mixture into egg yolks in a medium bowl. Return all of the egg yolk mixture to the saucepan. Bring to a gentle boil; reduce heat. Cook and stir for 2 minutes. Remove from heat. Stir in hazelnut liqueur and vanilla. Cool to room temperature.
In a large mixing bowl beat butter with an electric mixer on high speed until fluffy. Add cooled sugar mixture, beating until combined. If necessary, chill until spreading consistency. Makes 3 cups.