Basically the quotes that the others have provided tell you that we really don't know how hobbits came to be. Their beginnings are really a complete mystery. The elves didn't know about them because the kept to themselves, and their separation from the race of men happened at such a early time that their was not records of the occurance.
Quote:
The Hobbits are, of course, really meant to be a branch of the specifically human race (not Elves or Dwarves)
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Thank you for providing that quote because I have always been under the impression that their wasn't really a separation. I always thought that men started out individually, and hobbits started out individually, but it is just that they were so quiet that no one paid attention to them.
But I guess I was incorrect