does this work with hotmail?

My understanding is that the Hotmail server does not use the standard IMAP protocol so the only way to use it with the Apple Mail client is via the older POP3 protocol.

Pop3 downloads messages from the mail server Inbox to the Client Inbox. Many people, including myself, are happy with this but it does not synchronise folders between server and client which most people prefer.

You should find the settings required at:

http://windows.microsoft.com/en-US/hotmail/send-receive-email-from-mail-client

An alternative solution might be to open a free gmail account which has support for both POP3 and IMAP.

There is a related discussion which may interest you at:

https://discussions.apple.com/thread/4534169?answerId=20376127022#20376127022