There are several reasons for their incredible reputation. The first is Valenwood itself. Wild, untamed, and, some say, quite aware, there are entire regions of this wood which remain unexplored and house the most astonishing creatures. Only the most proficient trackers can hunt their prey in this strange forest without getting utterly lost.
The second reason is that many of these hunters are Wood Elves, born stalkers of prey, with a gifted sense for tracking.
But the biggest reason for the lofty reputation of the Valenwood Hounds is the hunter called Haras. A legend in his own right, some dispute that he even exists, but there's not a Hound that hasn't heard tell of his exploits.
Said to be unmatched in his devotion to Hircine and his skill at tracking, Haras was last heard from over a hundred years ago, when he set out to hunt the fabled Pale Senche-Tiger. Others, hunting in Valenwood, have claimed to have seen him from time to time, still hunting that elusive beast. Although if these claims were true, Haras would have to have lived long beyond the normal life span of an Elf.
Still, every one of the Hounds of Valenwood can trace his training to Haras and aspires to best him in fame and skill. That alone makes the Valenwood Hounds the greatest hunters in Tamriel.