This is weird. When running the Hii with the uncpath checked the proxyhost log only refers to a http:// path and never a uncpath, it has continuous lines with 401 error and 206 error in the http://preferredserver/path.
The lddwnld.xlg log contains several lines and in one shows success redirected from \\core server\path to \\preferredserver\path.
When I run Hii without the uncpath checked the proxyhost log has continuous 401 and 206 errors for the Preferred Server http:// path and one line only containing a 200.
The lddwnld.xlg log has continuous lines showing success but evey now and then is a Authenication problem line.
On this particular Preferred Server the credentials are successful for both the UNC and HTTP test in the Preferred server setup.