Dpaule: yes, subdomain should work, or any domain from freedns.afraid.org or co.cc. You just park it on your installation (do not redirect it!), then use HLIC which will cache blogspot images (i'm not sure, because my images were not from blogspot, but still not cached with this plugin) in your wpcontent/uploads/hlic dir, or whatever. But before that, you have to change the domain to the parked domain of yours (of course after propagation, so you can open wp-admin with that domain too.) Cache the blogspot images with HLIC (beware, do not cache it from your other parked domain! - it will download every image and change their location to yourdomainusedwithHLIC/wpcontent/uploads/hlic)
Now change back to the main domain, login to wp-admin, and use cache images to cache from the other domain of yours (so basically you cache from local domain, and hlic renamed files so you will not have any problem with characters anymore)
maybe it seems difficult, but if you installed both plugins and have a main and a parked domain too, then it is just about changing the wordpress url in wp admin twice.
change the domain ->use HLIC ->change back -> use cache images
I think your problem was that you were not waiting for the domain to point to your host, OR the redirection - you don't have to redirect any of the domains. You have to be able to use your wordpress site from the parked domain of yours too.