http://www.apple.com/itunes/itunes-match/
"Does iTunes Match stream or download songs?
On a computer, any songs stored in iCloud will stream over the air when played, though you can download them at any time by clicking the iCloud download button. iOS devices will start playing tracks from iCloud as they download and will store them so that you can listen to them later even if you don’t have a network connection. Apple TV only streams songs."
iTunes Match: Understanding the iCloud Status icons - http://support.apple.com/kb/TS4124
By the way, preferences only tell iTunes where to store media from that point on, or are used to consolidate a library to a new location. It does not get iTunes to inventory what is in the iTunes Media folder (nothing does that really).