I just spent a little while digging into this. This problem occurs in

app/helpers/hosts_and_hostgroups_helper.rb

on line 5. The gsub method gets called on group.to_s, which is a complete string of the child hostgroup and all of its parents if there are any. Therefore, the name of the current group (group.name) without parents replaces all the instances of itself in group.to_s. The gsub should only get called on the substring after the last backslash (i.e. on "test", not "test/test").

I've spent enough time on this for today without a quick fix, so I'm going to move on, but I will revisit this later.