Khajiit are some of the most furry sentients on Tamriel >_> No nord can even come close to the hairyness.
Indeed, though with Argonians, it's true you don't have to worry about hair, not your own, anyway, you still have to look at the other races' hair.
That's definitely not a hood.
Looking at the details of it, I think I agree, it definitely looks like it's supposed to be hair. Bad looking hair, certainly, but not to the point where I can't tell it's supposed to be hair at all.