Yep, that's a fungus but it is the good kind. Those are the fruiting body of fungus that feeds on dead and rotting plant material and is harmless to your plant. In fact it is actually helping your plant by helping in the decomposition of the dead materials which in turn feed your plant. Hydrangeas like moist well drained soil. Your soil appears to be soaking wet and this will lead to root rot. The yellowing is probably from watering too often and leaching away the nutrients.