The 24-year-old Swede aced the par-three 16th hole at par-72 Victoria Golf Club, en route to a scintillating seven-under 65 and an aggregate score of 11-under 133.
The Swede didn't even realize the ball had dropped in after she teed off.
"I couldn't see it and the crowd didn't want to yell because Laura (Davies) was hitting off on No. 17, so we walked up there and they were like, 'it went in'," Hedwall told the AP news agency.
Hedwall lay one ahead of Norwegian world number two Suzann Pettersen at the halfway stage with Australian amateur Minjee Lee, 17, a further shot back in third. Tiger Woods's niece Cheyenne matched Hedwall's 65 as she rocketed 80 places up the board to lie six shots off the lead, in contention for her second win in two weeks.
But the score of the day belonged to Sweden's Anna Nordqvist, who shot a women's course record 64 to share fourth alongside New Zealand prodigy Lydia Ko, 16.
Ko, embarking on her first pro season after winning four tournaments as an amateur, shot her second successive 68 to be three shots back heading into the weekend. Further down the leader board, Yani Tseng's struggles continued as the Taiwanese ex-world number one flirted with the cut before scrambling through with even-par 144.
The $1.2 million Women's Australian Open in Melbourne is the second stop on this year's US LPGA Tour after Jessica Korda won last week's season-opener in the Bahamas.