As Ted has implied, that really depends on how you are defining hotspot.
If you want it to act as a real hotspot, it must have internet connectivity so that it can send data "out there" whether it has it via an internal wireless connection like smartphones use or it's just connected to the internet by WiFi. It will use whatever connection it has in the hotspot function to get things to cyberspace.
If you want it to act as a local area network, without necessarily being in contact with cyberspace, that can be done, too. It's really the same concept as when your modem router somehow loses connectivity to cyberspace. Even though that's gone, all the devices that are connected to it within your home, business, whatever can still communicate with each other.
Settings, Network & Internet, Mobile Hotspot Pane. The toggle to turn this feature on says, Share my internet connection with other devices. And that clearly states what it does as far as a connection to the internet. If you have no connection to the internet, then it can't be shared, but you can still have connectivity between devices with the computer acting as the router.
Any additional deep diving into this feature should occur either on the Chat Subgroup or the Windows 10 for Screen Reader Users Group (or another venue of your choosing).
Brian - Windows 10 Pro, 64-Bit, Version 20H2, Build 19042
Any idiot can face a crisis. It's the day-to-day living that wears you out.
~ Anton Chekhov