The paper critically reviews the current state of the art in flow inside sidewall gaps of hydraulic pumps and turbines. It describes the consequences of the presence of this type of flow in turbomachinery and then relates it to other physical phenomena that determine the behavior, operating characteristics, and overall performance of the machine. Despite the small dimensions of the rotor-stator spaces, the flow in these regions can significantly affect the overall flow field and, consequently, efficiency. The circulation of the fluid inside the gaps and secondary flow that is caused by rotating elements influences the disk friction losses, which is of great importance, especially in the case of low specific speed pumps and turbines. The flow pattern affects the pressure distribution inside a machine and, thus, generates axial thrust. The presence of secondary flow also significantly changes the rotordynamics and can bring about undesirable vibrations and acoustics issues. This article aims to review and summarize the studies that were conducted on the mentioned phenomena. Experimental and numerical studies are both taken into consideration. It proposes some requirements for prospective research in order to fill current gaps in the literature and reveals the upcoming challenges in the design of hydraulic machines.