Hydro - water
Static - still
Shock - disruption
You take something still and wet, you hit it with something fast, the energy is transfered through the medium disrupting it. Remember newtons third law? As the bullet slows down the energy has to go somewhere, it goes into the animal.
By definition, it exsists, I have seen it, we all have seen it.
REAL hydrostatic shock depends on surface tension of the medium. When the shock is enough to break the tension holding the tissue together, that is where you see the evidence... the hydro part once again because the energy is transfered through fluid. The bullet is going to damage the liver or lungs much more than it is going to damage muscle, because the surface tension of the muscle fibers is much greater than that of the softer organs, and the organs contain more fluid, better transfering the energy.
Now what you see is evidence of hydroshock, the shock actually extends beyond the damaged area, as the energy drops below the level which will break the tissues tension, you no longer see it as clearly evident further away from the wound channel.
Bigger bullets which carry MORE energy don't do as much damage, because they don't slow down as much, meaning the tissue is not absorbing as much energy. The smaller faster bullets are slowing down more, thus transfering that energy into the tissue.