In the interest of fairness I thought I would share the outcome of my enquiry to Chaos Group.
"Thanks for the reply.
Actually the on-demand mip-map textures approach in 3.5 is what many of the other render engines is calling “out-of-core”. We actually do a few extra things and we prefer to not call it out-of-core textures. It allows you to store much more textures and there is almost no performance hit.
The traditional out-of-core has a few other drawbacks – for example it requires huge reserved buffers from the GPU (for ray contexts) just in order to be able to work.
Hybrid has many use cases, for the case of “not-enough memory even when using on-demand texture” it is just an insurance."