Hi Mike,
We have used a Hitec 785 as you describe in a couple of my wife's yachts, a vintage Marblehead and a Metcalf Mouldings Moonbeam. We tied the sheet loop as you suggested above using a few spare inches of cord from the first end that was secured, to attach the second end on to the drum. We tried to ensure that there were about 3 turns of cord 'spare' at each end of the travel, i.e when the servo is at one end of its travel, one drum will have about 3 turns of cord on it , the other will have about 6 and vice versa when it is at the other end. The loop of cord was pulled just taut around the pulleys, it does not need to be really tight or its likely to increase the friction in the system. However it does need to be tight enough to ensure the loops do not fall off or ride up the edges of the drum or pulleys, or sag into the hull and snag on something.
We used three hole bowsies threaded on to the above loop of cord to attach the sheets which connect to the sails. These give a bit of scope for adjusting the attachment position and means there are no knots to tie in the winch loop except the two at the drum end. I think this makes it easier than trying to tie in metal rings to attach the sheets to the loop.
One problem we came across was that the cord supplied for the Moonbeam kit tended to twist when it was loaded by the winch pulling on the sheets. This meant that as the sails were pulled in the winch loop twisted and the sheets to the sails ended up wrapped around it for several inches which then tended to get caught up in the cord as it wrapped around the drum. We solved that problem by replacing the 'traditional' cord with braided fishing line. Dyneema braided line has been the best we have found so far, (as supplied by Nylet sails).
Ideally you should try and ensure that the full travel of the winch servo is used for the sheets. I think the drum gives around 450 mm of travel so the position of the sheet exit from the deck and attachment to the sail boom needs to match that. If there is too much travel on the servo then we found that an Action Electronics Servomorph was a very effective way of adjusting the travel and end points of the servo (and much cheaper than buying a winch servo which was adjustable in its own right).
Hope that helps, if you have any more questions let me know or send me a personal e mail.
Gareth