The whole point of Personal Hotspot is to allow other devices to share your iPhone's cell connection to the Internet, so yes, it does have to be connected to the cell network to function. Your carrier also has to offer Personal Hotspot as a service for which you have to sign up, often at an extra cost. If you haven't done so already, contact your carrier and inquire about such service.
This article may be of help:
Hi. As mentioned above my carrier does provide the service. For the first two years of your contract it is free. So that part is not the issue.
The issue might be that I am getting automatically connected to the provider's wifi network at the restaurant. I'll contact them about that point.
The problem was that the network settings needed to be reset. After that it worked properly which is like this:
- When I entered the restaurant (or at home) the iPhone 5 connected to the known wifi network. That's fine.
- When I turn on personal hotspot, the wifi mark disappears and you see the carrier name and connectivity in its place. In my case it said "KDDI LTE".
- At this time the wifi network name appears just fine in the personal computer's list of hotspots and you can select it, enter the password and connect.
- When you turn off the hotspot, if you were connected to wifi then the wifi mark re-appears.
Anyway, I just tried it from home. I did a speedtest on my iMac tethered by wifi to my iPhone 5's personal hotspot. Not too bad - download 7.23 Mbps and upload 6.70 Mbps.