awk '{num=split($0, A,"");                                                                           ##### I am invoking the split function, which works on split(line/variable, array_name(which we want to create for this variable/line),delimiter of the line or variable). So here I am creating an array named A with respect to $0(complete line) whose delimiter is NULL. as per your Input_file shown eg--> hello, doesn't have any space or any other thing which segregates it, so NULL delimiter I am taking here to take all elements of this into an array named A. Also I am storing the total number of elements or you could say array named A's length into variable num.
      for(i=1;i<=num;i++){                                                                           ##### Starting a for loop from variable i=1 to till the value of variable named num.
                                if(i==1){                                                            ##### Here I am checking for condition if i has value 1, which is for very first character of line where before it NO character will be there so putting "# #" before it in following print statement, as per your requirement mentioned.
                                                print "# #" OFS A[i] OFS A[i+1] OFS A[i+2]        
                                        }
                                else if(i==num){                                                     ##### Now mentioning 2nd condition where variable i's value is equal to num, means last element of the complete line where no more further 2 characters will be there so printing " # #" there too in following print statement.
                                                print A[i-2] OFS A[i-1] OFS A[i] OFS "# #"
                                               }
                                else    {                                                            ##### This condition invokes when above both conditions are FALSE means when i's value is NOT equal to first and last character of the line.
                                                Q=A[i-2] OFS A[i-1] OFS A[i] OFS A[i+1] OFS A[i+2];  ##### Here I am storing values of array A[i-2], A[i-1], A[i], A[i+1] and A[i+2], which is because current array's value will be A[i], so as per your requirement we need 2 elements before it and 2 elements after current value, as mentioned before this condition will be only TRUE when it is NOT very first or very last character so it will put these values into variable named Q.
                                                sub(/^[[:space:]]+/,"# ",Q);                         ##### I am substituting any starting space in variable named Q with a "# " in case any element is not having 2 elements before it.
                                                sub(/[[:space:]]+$/," #",Q);                         ##### Substituting any space at last of variable Q with " #" to complete the pattern as second last element doesn't have 2 elements after it.
                                                print Q                                              ##### printing the variable named Q's value now.
                                        }
                         }
     }
    '   Input_file                                                                                   ##### mentioning the Input_file here.

awk -vs1="###" 'BEGIN{v=length(s1)}{$0=s1 $0 s1;num=split($0, A,"");for(i=v+1;i<=num-v;i++){q=i-v;p=i+v;while(q<=p){Q=Q?Q OFS A[q]:A[q];q++};print Q;Q=""}}'  Input_file

# # # h e l l
# # h e l l o
# h e l l o #
h e l l o # #
e l l o # # #
# # # w o n d
# # w o n d e
# w o n d e r
w o n d e r f
o n d e r f u
n d e r f u l
d e r f u l #
e r f u l # #
r f u l # # #

awk -vs1="####" 'BEGIN{v=length(s1)}{$0=s1 $0 s1;num=split($0, A,"");for(i=v+1;i<=num-v;i++){q=i-v;p=i+v;while(q<=p){Q=Q?Q OFS A[q]:A[q];q++};print Q;Q=""}}' Input_file

# # # # h e l l o
# # # h e l l o #
# # h e l l o # #
# h e l l o # # #
h e l l o # # # #
# # # # w o n d e
# # # w o n d e r
# # w o n d e r f
# w o n d e r f u
w o n d e r f u l
o n d e r f u l #
n d e r f u l # #
d e r f u l # # #
e r f u l # # # #