I will explain this issue with example :
For example I want to set image for any product's description area so I go to WYSIWYG editor and click on image insert icon so it's open insert image section and after that we can see different media folder to select image.Now problem is here. we can't see any image here and instead of Image it's showing ALT tag.For selected Image url is something like this https://test.hotdiamonds3.bathcomms.com/index.php/admin/cms_wysiwyg/directive/___directive/e3ttZWRpYSB1cmw9Ind5c2l3eWcvR2lmdENhcmRzL0NBUkQ2LmpwZyJ9fQ,,/key/d5d8fc754dd85fc475b1a8e17ae890c2/
I have set 777 permission for media and it's subfolder.