I don't doubt your problem with MUI3.8, but that doesn't mean the best solution is to drop hard drive directories and use HDFs instead. The solution depends on what the real problem is
Possible problems:
1) The MUI3.8 depends on specific file metadata / permissions. Solution: Finish implementation of file metadata for directory hard drives in FS-UAE.
2) There's a bug in FS-UAE's directory hard drive support. Solution: Fix the bug.
3) MUI3.8 uses some special file names and you extract the archive outside the emulated Amiga. Solution: Extract the archive from within the Amiga also when using directory hard drives.
Any error message or indication of what the problem might be?