I agree with your buddy that just laying down insulation on top of the engine is questionable. Aside from moving parts there are also bumps and vibration that might abrade the envelope. Attaching to the hood with a gap seems safer in my mind.
The current insulation reigning champion are aerogels:
https://www.aerogel.com/about-aerogel/
but that is hideously overpriced and better suited to other applications (like space flight where every ounce costs money to launch).
There are at least four factors that we want to consider for an insulation in the engine compartment.
1) Temperature. Since most compartments won't be above 200F, virtually all insulations mentioned will be fine temp-wise. The only potential issue is failure cases like an engine overheating, in which case you'd want something rated past 300F just to be safe.
2) Flammability. Engine fires happen, and we have to account for them. This rules out any kind of paper, cellulose, etc. and makes us favor mineral wools, which are already known for their non-flammability. Ceramic fiber is a kind of mineral wool.
3) Longevity. Many kinds of insulation are hydrophilic, which long-term degrades their insulation capacity and/or structure. This is a notorious weakness of fiberglass bats. However, in this application, moisture will likely be regularly baked out of the material, so it's less of a factor.
4) Cohesion. We want the material to retain its shape and to not flake into the engine compartment. This rules out all fills, grains, etc. It also makes us favor pre-made insulation that is faced or sided.
So after the whole analysis, mineral wools come out on top because of flammability. If you dropped that constraint, then a whole range of insulations (including foam et al) would then be viable. Oh, mineral wool is also generally hydrophobic with good cohesion, which is why I chose it in my own case.
If you are just looking to buy something, the product Isaac Zachary linked is great. Any faced mineral wool would work... the only thing I would do is try to find something in a larger single piece, and cheaper. That makes it easier to install, and easier on your wallet.
Good luck!