Wow, the thread continues...
I'm very comfortable with Mike Mearls solution, and I don't see any reason to complicate it any more than that. And I'm not talking about just the halfling ability. A few thoughts -
My concern wasn't that the halfling was hidden, it was that it was able to hide again in the same context over and over. And that concern wasn't just for that ability. My concern was this:
Can a character attempt to Hide when his position is known?
Mike's solution addresses that very appropriately. Yes, they can attempt to Hide, but it may be at a disadvantage.
I'm good with this in the lone tree scenario as well. As several have pointed out, even if you don't move you can attempt to Hide. OK, so you've fooled them into thinking you've disappeared. But your attempt may be at a disadvantage.
I'm sure there will be a debate as to whether this applies to other situations since the question was specifically about the halfling ability. But it makes sense to me. Once an opponent knows you are there, they will be paying closer attention to your attempts to Hide. It doesn't mean you can't hide, just that it's harder.
Naturally Stealthy gives a halfling a bonus location to hide, not a bonus to its hide ability. Otherwise it would have granted them Advantage when making a Hide attempt, behind an ally or anywhere else.
So I think the situation is the same, the opponent knows your position, and knows what you're trying to do.
So here's the sequence I see regarding the halfling ability:
The first time the halfling uses the ability, he moves behind his fighter ally and makes a Stealth check against the opponent's Perception check and succeeds. He's now hidden.
If they opponent has initiative, they can try to attack where they think the halfling is, but do so at a disadvantage at least.
Then the halfling attacks. Yes, they will have to reveal themselves. I see this as a situation where the reaction of the opponent, even if they see them, is slower than the hidden halfling's ability to attack. In addition, the opponent may not be looking at the spot that the halfling comes out of hiding to attack. In any event, once the halfling attacks, he's no longer hidden.
Now the opponent can attack the halfling, whether his attack was readied or not. Because the halfling is no longer hidden. He's also behind an ally, so now I agree he would have half cover.
For the next round, the halfling uses his cunning action to attempt to hide again. So he moves behind the fighter again. This time the DM could rule the opponent is expecting the halfling to be there. So the halfling makes his Stealth check at a disadvantage. If he succeeds, great, the same thing applies. If not, he's not hidden, merely has half cover.
So:
1. Hide/Perception check
2. Hidden, attacks with advantage, attacks against are at a disadvantage (if not ruled behind total cover)
3. The halfling attacks. Once the attack hits or misses he's no longer hidden.
4. Attacks against the halfling are behind half cover
The only potential on subsequent rounds is that the Hide/Perception check is at a disadvantage.
Combatants can be moving all the time. I'm not sure just 'moving to where you can see the halfling' doesn't mean you'll automatically be able to see them, because I think they'll be in motion as well. I suppose flanking them could reveal them. I'll have to think about whether that's in the spirit of the ability. In terms of combat, the halfling has advantage for less than 6 seconds assuming he attacks that round. I guess if the halfling lost initiative it makes sense. But is the halfling revealed to both? Just one?
Note that the halfling can successfully Hide from some but not all opponents. If he fails against some, they could reveal his position to the others. But I think that for that round, I'm OK with him still being hidden for some opponents. I would be OK with the idea that once he's flanked he can't attempt it again, at least against the opponents flanking him.
I think this addresses all of the issues and works for the lone tree, continually sniping from a window, attacking a creature with a heightened smell, etc.
So here's the ruling:
If the opponent knows your position, you can still attempt to Hide, but it may be at a disadvantage to the Hide check.
Randy