I'll go ahead and try to explain it a little better, particularly since hair works the same way as clothes.
When you use MakeClothes, at some point you have to load a target object ("Load Human Mesh"). These come in two basic varieties, with helpers (e.g., "Average Female With [sic] Helpers") and without (e.g., "Average Female"); the obvious difference is that the "With Helpers" objects include not only the human body, but a bunch of vertices that represent different types of clothing, and hair. Thus, just below the waist, if you examine the human mesh closely, you'll find three layers of vertices: the body itself, a tights "object" that lies just on top of the body, and a skirt "object" that conforms to the body in places, but stretches over it in others (between the legs, to be precise).
For the modeler, the obvious use of these targets ("human meshes") is to fit clothes; if you use the "with Helpers" versions, you can also use the helper "objects" as templates for creating clothes (this works well for skirts or hair, but with shirts, you run into the problem that the edge loops don't coincide with where you'd want to put seams). However, the targets also serve another purpose: when you hit the "Create Vertex Groups" button and then the "Make Clothes" button, the program calculates the distance between each vertex of the item of clothing and nearest vertices in the human mesh, and then uses these relationships to deform the item of clothing when the body moves.
I haven't looked at the source code to examine the algorithm, but the bottom line is that, if the vertices in the clothing are associated with vertices in the human mesh that have a very different shape, bad things tend to happen. To avoid this problem, you have to do three things before you hit "Create Vertex Groups" (I said two things before, but let's break it down):
1. Select the human mesh, and go into "Edit" mode. Select only the vertices that make up the appropriate helper object (or in some cases, like a long coat or a dress, objects). This can be tricky to do by hand, since some objects cover others (the "Hair" object makes the upper part of the "Tights" object, which is used for shirts, especially hard to work with), and you can't just delete the stuff you don't need, since this fouls up the program. Fortunately, each helper object has a stand-in material with a different color, and there's a handy "Show Selection" button that automatically selects the most commonly used sets of vertices ("Body", "Tights", "Skirt", "Coat", and "Hair"). Doing this will eliminate a lot of the "wedgie" effect, which is due mostly to the skin-tight contours of the body itself and the tights helper in the area around the crotch.
2. Unselect all the vertices that aren't directly underneath the clothes in question. Thus, if you're making a short skirt, not only will you not select the layers of body and tights vertices beneath the skirt helper object, but you'll make sure that skirt helper vertices that lie below your skirt's hemline (or above its waist) also aren't selected. This step eliminates some distortions that occur for clothing whose vertices are far away from the body.
3. Finally, get rid of vertices in "crevices". For reasons I don't grasp (better understanding of the body than of clothes on the part of the sculptor, probably), the shapes of the helper objects don't correspond very well to real clothes in certain places. Specifically the upper tights follows the contour of the skin between the breasts, and the lower part of the tights dips into the "crack" between the buttocks, and clings skin-tight against the area where the legs join--as if it were painted on. The skirt helper at least stretches across the space between the legs, but it, too, dips into the crack between the buttocks, rather than stretching between the buttocks like a real skirt would. Unselect the vertices in question: fortunately, they're easy to find, because they all lie at or near the center line of the human mesh (that is, points whose "X" value is 0, and which lie on the plane that divides the left and right sides of the body). You might want to substitute other points that don't lie directly beneath the clothes, but which don't dip into the crevices. This step should eliminate almost all of the wedgie effect not eliminated by step #1.