Follow the road west from Hangman's Alley all the way to the end to come across the hidden treasure marker. Here, a couple drowners are gathered around several corpses. Take them out, then loot one of the bodies for the Smuggler's notes to start this quest.
The marker will be nearby, in the water. In fact, if you turn in its direction, you'll see a half sunken ship, that's where you're headed. There are about 5 drowners in the water and, once you've cleared them out, dive around the end of the ship that's sunk. The chest will be right around here, near several (empty) containers.
- The gradual expansion of literacy in the Northern Realms pleased Geralt greatly, for this meant he happened across more and more interesting notes and missives - such as those he once found on the banks of the Pontar, near Oxenfurt...
Those were the days. You'd smuggle a few bottles of hooch into Oxenfurt, then loiter about the dormitories selling it to students. You'd come away with a hefty sack of coin, and they'd have their spirits fortified for study. Then along came Radovid, who shut down the university, chased the students away and positioned ballistae on the riverbank to shoot everything floating up or down the Pontar, swans included.
- But there hasn't been a dark cloud yet that didn't have a silver lining. Yesterday I saw our brave soldiers sink a merchant vessel. It went straight to the bottom along with its crew - and its cargo. A shame about the men, true, but it would also be a shame to let all those goods go to waste. So me and Martin will fish them out, dry them off and then sell them - and maybe at last I'll have something to put in my pot.
- The Redanian soldiers' mistake turned out to be Geralt's good fortune. He rescued several valuable items from the ship they sank, then traded them for a great deal of coin.
- Read the letter you found.
- Find the sunken treasure using your Witcher Senses.
- This is one of those quests where the suggest level doesn't really matter much. Even with enemy upscaling, the drowners appear to stay around the player's level (e.g. if player is level 11, drowners might be 10, nowhere near 18).