What you can do may depend on the email system you're using (I've never used Hotmail!).
In general though, if you are using POP3 protocol, messages are retrieved from the ISP's POP3 server and stored in your computer. You should be able to create whatever sub-folders within the Inbox that you want to.
With IMAP4 protocol, messages remain on the ISP's IMAP server and your email program "synchronises" with the server either automatically or when you run a Send/Receive session. As Hotmail is essentially a web-based system, you may be able to create sub-folders by going to the Hotmail website to configure them.
If Hotmail is using Microsoft Exchange Server then, similarly to IMAP, Outlook will "synchronise" with the mail on the server rather than downloading and storing in your PC. This could be the reason why you have to use Outlook instead of Outlook Express which does support IMAP. Again, you may be able to configure sub-folders on the website, which Outlook will then pick up as it synchronises with the mail server.