Having now used XFES Similar Threads on my site for three months, I believe the feature looks at more than thread titles.
For example, we have a thread titled solely "Opitima Number 3", which is the name of a boat. The posts talk about whether Rustoleum or EZ-Poxy paints are effective to paint the boat. Similar Threads turns up other threads having posts with the words "Rustoleum" and "EZ-Poxy" in them.
I've also noticed that if all other similiarities seem to fail, Similar Threads will offer up completely irrelevant threads simply because they are authored by the same person as the OP.
All in all, Similar Threads is a great feature to promote searches and to grab readers for seriatim thread surfing, and I recommend it highly.