IP range support for custom groups is only available in LMS 3.0.
DNS is not required. You can use a local hosts file if you want hostnames to show up in LMS. However, none of that will allow you to create custom groups based on IP ranges in LMS < 3.0.
As a workaround, you can use the "contains" or "startswith" operators. For example:
Device.ManagementIpAddress contains "10.1.1."
Device.ManagementIpAddress startswith "10.1."
But this will not allow you match on classless boundaries.