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This term means "water sac" in Greek. It is harmless, and will disappear without surgery in almost all cases. It is usually a condition of infant boys and resolves within a few months without treatment.
The testicles form in the abdomen during fetal development and then move down into the scrotum near the time of birth. As they move down, they drag with them a bundle of connections to the body: a nerve, artery, vein and spermatic duct or cord. Where the testicle penetrates the abdominal wall, it pushes forward a pouch of lining tissue (sort of like sticking your hand through a rubber sheet). The neck of the little pouch formed in this manner is supposed to seal off and not leak. However, sometimes the seal around the cord of nerve and vessels is not perfect, and fluid (that normally lubricates the internal organs sloshing around in the abdominal cavity) starts to leak down into the testicle sac. Slowly, the sac around the testicle swells up like a little water balloon. (Note: sometimes the sac is higher, actually around part of the spermatic cord... same basic thing, though.)
You may think, and it is certainly possible that your boy has a hernia. Your doctor will feel the lump, and may shine a light through it (a hydrocoele lights up like a bulb in a dark room - a hernia does not - we call that transillumination). Unfortunately, for the same reasons that a hydrocoele forms, a hernia can also form. Your doctor will tell you to watch the scrotum on that side even after the hydrocoele reabsorbs and disappears in a few months. If a lump reappears there, probably one that comes and goes - see your child's doctor.