Does a hovering figure that is in a water space hovering over water or is it actually in the water?

Hovering figures are considered o be grounded and suffer terrain effects

Not sure what you mean. Water is treating as hindering terrain for movement, not LOS. Hovering figures ignore hindering terrain for movement purposes. Does that help?

Hovering characters suffer terrain effects?
What are you talking about? For combat they do, but for movement they do not.

Water has no effect on fliers.

Water is considered hindering for the purpose of movement (it is clear for LoF), and hovering figures can ignore hindering terrain for the purposes of movement---hindering figures ignore the water.

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