Unreal will run from wherever: it’s just a program.
The issue that is being highlighted here is the performance between the disk-storage and the rest of the machine. For any kind of streaming assets you will want the best performance; streaming loads data on-the-fly at runtime, so having a fast transfer speed for the harddisk is desirable.
If you are connected over a USB that is going to be very slow… Install to the local disk inside the machine.
Past that, faster is better. You will surely want for larger amounts of space just to hold assets, projects and the like. They can add up quickly! But for running applications, you will want to make sure you have fast I/O. This is where a) a local, installed disk and b) NVME would be ideal.