Ok, I have been getting very confused on how this double entry stuff works... Here is whats going on.

Real world accounts:
Chequing

KMyMoney Accounts:
Chequing
Chequing>Hobbys

I deposit $300 into the chequing account. I want to save $200 and the other $100 is for groceries so I create a split transaction. $100 goes to expense>groceries and $200 goes to accounts>Chequing>Hobbys. Total unassigned is $0, after the split the chequing accounts balance remains at $300.

I open the legder of the Chequing>Hobbys account and it shows $100 under the PAYMENT section, so the savings account is -$100. This makes no sense at all! If I change the $100 as a "Pay From" instead of "Pay To" then the Hobbies account has $100 but the Chequing account balance does not match the real world and the $300 entry has $100 uncategorized.

Another way this is strange. I have a $100 deposit in Chequing. I select it and set the category to Chequing>Hobbys. This turns the transaction into a transfer. In the Chequing>Hobbys ledger that becomes a $100 Payment! Even though i am transferring a deposit.

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What I am trying to do is budget everything. Having a running tally under an expense category makes sense for things like car repairs but for my hobbies I want to know how much I have saved then apply the purchase to that category and get a total value left or owing. Apparently using a virtual account does not work but I have no idea how to do this.

If you want to budget, you could use the budget view

If you still want to use subaccounts, check the total for the transaction is $300, and all splits are in PAY TO

Yes the $100 is shown as a "Pay To" the original transaction, but that makes the $100 go into the payment column.

Main deposit -> edit splits:

ATM Deposit $100 (from original $300 I subtract $200)
Chequing>Hobbies $200

Sum of splits $300
Unassigned $0
Transaction amount -$300

On the cheque leder the ATM Deposit is still $300, the $200 is in the Chequing>Hobbies as a payment "Pay To: ATM Deposit"

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I use the budget view for 99% of things but the categories only track running totals of transactions and is not user friendly. I save a certain amount every pay and sometimes lump sums from side jobs, it would be nice to have a view of just those specific splits and deposits with memos and the associated purchases.

How would you go about achieving this?

Possible option is to have accounts for each of your set-aside savings, named accordingly.
Here (UK) I have one bank (chequing) a/c which I balance against one Kmymoney current a/c. To break it down, as in your case, I would create one (or more) current a/cs with appropriate names eg Hobbies. Then I would transfer money from current to Hobbies which would debit master and credit Hobbies so showing how much you have 'saved'.

When you decide to buy something that is debited from Hobbies (or whichever) so the amount saved is reduced accordingly. Your worth would obviously be the sum of all those accounts.

(Obviously, if an unexpected expense meant you had to use some 'saved' money you would transfer $xxx back from Hobbies (or whatever) to chequing to cover that bill.

Possibly clear as mud but hope it may give you an idea