Love this mod, I can't play without it anymore. I usually have it set to 256. Before I had it set to 1024 but then my computer would freeze cause it ran out of ram
It's a setting you can change. The default is a "quick generation" mode which looks as similar to the world seed/settings as it can without taking the performance hit of actually generating it. But it can either be changed to generate the chunks genuinely out to the render distance (which would be lag hell for 128 chunks) or to only render already generated chunks (like you suspect). Only the latter works in multiplayer though.
I really like this mod. I need to try it again since I got a better pc. It will look amazing when the first few chunks can be displayed with even better quality.
You can actually bump it up to 256 or 512 without a huge perf drain depending on your setup, distant horizon doesn't use the normal game renderer... You do give up shaders for it...