Straight from the Microsoft docs ... "The user accounts must be hybrid user identities, which means you'll also need Active Directory Domain Services (AD DS) and Azure AD Connect. You must create these user accounts in Active Directory and sync them to Azure AD. The service doesn't currently support environments where users are managed with Azure AD and optionally synced to Azure AD Directory Services (AAD DS)."
The new supported scenario is ... AVD session hosts can be cloud-only (joined to AAD - not joined to AD DS or AAD DS). FSLogix container can be cloud-only (joined to AAD - not joined to AD DS or AAD DS). Users must be hybrid cloud (sourced in AD and synced to AAD via AAD Connect).
This feature allows customers using AAD Connect to eliminate the need to deploy and incur the ongoing consumption and operations cost of AD DS VMs or the AAD DS service in Azure just to support AVD.
This feature does not support the full cloud-only scenario. Of course, cloud-only AVD would be the killer VDI app :). W365 Cloud PC just announced (2/9/2022) cloud-only in preview. Hoping AVD to not be far behind.