Greg,

I think I found a bug in the order in which things gets rendered:

http://puu.sh/8SFrR.jpg
http://puu.sh/8SFsU.jpg

From the above images, whilst looking from above the water, I can only see the grass that sticks out of the water. As soon as I move the camera down (second picture), the grass becomes completely visible.

Grass that is completely under the surface of the water is invisble untill the camera is submerged.

Thanks for reading and happy bug-squashing! :-)

Just bumping this, as it was not mentioned in the new release.

Or is this a feature?

You could try using different material techniques for the grass.
Like
alpha_test,
grass,
blend_light,
blend_light_grass,
test_blend_light,
test_blend_light_grass,
But I can't promise that it will give you the effect that you want.