I'm assuming the bypass valve you are referring to is the hot water heater bypass. It will be located right at the hot water heater. Depending on how it was made there will be either two manual valves or one manual valve and a check valve with a short piece of pipe between them. The handle of the valve(s) will be inline with the bypass pipe when the heater is bypassed, and inline with the pipes to the heater when it is not.
Normally, valves will be closed when the handle is across the pipe, open when the handle is in-line with the pipe, or in the case of a three way valve the handle will be in-line with the pipe that it's flowing to.
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