It is just a shortened version. It's kind of like going through 0 - 100 by tens, but instead is going through 0 - 255 by 16's I believe. So for each color R, G, and B (#RGB) you only get 16 different values instead of all 256 for each color. It's usually used to define grey, white, and black because it's much faster and easier to type.
Grey: #AAA, #666, #EEE, #333, etc.