Pixelated Alpha Textures - smooth in Photoshop

Hello!

I am trying to convert a hair from a video game, and it's going pretty well until the texture--which is an issue I've not encountered before. I'm using Photoshop CS6, and even though I am using the correct alpha from the hair itself, it is saving (dds AND png) with horrible pixels. The file size is 1024 x 2048, DXT5 interpolated alpha, generate MIP maps. I have recently switched from Photoshop CC to Photoshop CS6, but have been using it successfully to convert objects so far.

Here is an image of how it looks in photoshop.

Here is an image of how it looks in game/in S4S.