Smith was taken into custody without incident and will now be returned to the facility, Victoria Police said. Smith has been held at Thomas Embling Hospital in Fairfield since 2005, for committing serious sex offences and burglary.
Thomas Embling is a 116-bed forensic mental health hospital whose patients are usually transferred from prison or ordered by the courts to undergo psychiatric treatment.
Smith has been allowed unescorted community leave for more than 10 years.
Detective Superintendent Peter De Santo said Smith left the hospital at 1pm on Friday, saying he was going to a gym in Macleod. He was due to return at 5pm.
Smith was seen near the corner of Whitehorse and Springvale roads in Nunawading on Friday afternoon.
Detective Superintendent De Santo said there was later an unconfirmed sighting of Smith in Ringwood, between 2.30pm and 3.30pm, and police believe he remains in the area.
Smith has family in the Ringwood area.
Detective Superintendent De Santo said police had been concerned “because [Smith] is subject to serious sex offending and he is currently subject to a custody supervision order”.