Is it possible to create custom hair?

As far as hair color it is easy to add additional colors. Hair styles are more complex because a new mesh is required.

As Elf said, it's easy to apply new textures, (Recolors, anyway) to existing hair. But creating custom styles is difficult.. Luckily, I'm personally satisfied with the options existing for hair STYLES, but I did take it upon myself to throw in some more textures.
Do you want a copy of my personal module?

Just think of hair as soft helmets. DS (1 or 2) replaces the head complete with helmet or hair, and applies the face texture to the replacement head. My head-making tutorial should still hold up.

The same thing applies for beards. The most complex case is the DS2 dewarf, as he has head bones for speaking, and you don't just weight everything to the head bone, except for the neck ring. It's possible, and one of Pheonix/Volcan's mods has one of my dwarf beards.

Which reminds me that you might find some other hairstyles in various mods. This one was made for a different head, but could be adapted if you know your way around gmax.