I think you’re right @rothnic that it’s not immediately communicated that hierarchical lists only really work for traditional one-to-many relations (or many-to-one depending on which way you look!) and this has to be true all the way down the chain, so to speak.
Personally, I intuited that from the way the feature was trailed by Michael and the team, so I’m not disappointed/confused.
Interestingly, I had kind of hoped that there might be recursive possibilities (see Representing recursive relations) and that would actually have been more useful to me than supporting many-to-many relations, but it is what it is.
In terms of removing the limitation, I presume that you mean that you would like (for many-to-many relations) that ‘children’ are shown in the hierarchical list under all of their ‘parents’?
p.s. Just out of interest, I wondered for your example with Project → Issue type → Issue, why Issue Type is a type, rather than say a single-select field (or even multi-select) for Issues? I may be wrong in inferring what you are using these terms for though.