Don't worry, it isn't in the water, it's in a small Island a bit east of the dam.
You step onto the beach at the right, where there's a crab, and when you swim forward from there, in an almost straight line, you find the island
Oh, nevermind. It's probably the main character's boss. He's a dog now.
You'll have to go to the fortress in which Falgar destroyed the crystal and turned one of the generals into a boot.
Once you enter the fortress like you did when you reached Falgar with the whole team, you'll find a hellhound sitting in a soldier's quarters. That Hellhound is actually a master, the general you saw getting turned into dog right when you started the game.
Check the rooms on the second floor, next to the book room where there used to be two firebats.
But if it isn't that one either, then probably is the other red hound in Stahlheim's dam. He's a passive dog that just wants t be away of the war, Benno's the one who activates the option of inviting the red hound to the Orc Bastion