You simply need to set up the instance buffer in the same depth-sorted order than you would render the objects without instancing. Said, farest away goes in first, nearest last. Instanced meshes are quaranted to being drawn in the order of the instance buffer. This should solve your alpha blending/testing problems and you should be able to use instancing.
PS: I hope you this if for fun/learning only, I quess blizzard wouldn't be too happy about you using their graphics ;)