Working OK for me here:
mizar:[~] Xnest :1
error opening security policy file /usr/lib/xserver/SecurityPolicy
Couldn't get keyboard.
Could not init font path element /usr/share/fonts/X11/TTF/, removing from list!
Could not init font path element /usr/share/fonts/X11/OTF, removing from list!
Could not init font path element /usr/share/fonts/X11/CID/, removing from list!
xnest 1.1.1-0ubuntu6 seems to correctly look in /usr/share/fonts/X11;
perhaps you are running a different version.
** Changed in: xorg-server (Ubuntu)
Status: Unconfirmed => Needs Info
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Xnest crashes on start
https://launchpad.net/bugs/56221
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