Its design is that of a stereotypical demonic entity, being well-muscled with red skin, long claws and horns, red eyes, sharp fangs and two tentacles sprouting from its back which are presumably incomplete wings. However its "fangs" actually resemble those of a spider or large insect instead of ordinary demon jaws, which could hint towards Alessa's love for butterflies and moths. Its wing frames jerk about wildly and constantly.
Alessa's Dream is given little characterization, beyond its savagery in battle. After Travis Grady completes the Flauros, he intervenes in a ritual being conducted by the Order within the Green Lion Antiques shop. After being sedated by Michael Kaufmann, Travis enters a nightmare-like state where he is forced to battle Alessa's Dream, who may have been held prisoner within the Flauros.
Alessa's Dream behaves very similar to the Incubus from Silent Hill. It is quite powerful and should not be taken lightly. It attacks with highly powerful physical moves and demonic magic. It will try to slash at Travis when he gets close and follows him if he runs. The beast can open up its chest for a powerful, beam-like move of fire and also call upon a damaging, flaming rain. It is advised that Travis dodge its attacks carefully and heal when needed. It's best for the player to use their most hard-hitting firearms against it.
It may represent the Order's idea, as a collective, of what God could look like. It may also be Alessa's fear of what God will turn out to be, or it could represent Travis Grady's general perception of the Order and its members.
It may also represent what Alessa thought would be trapped within the Flauros - upon being told by her mother that the Flauros was a "cage for a demon", Alessa envisioned this demon, and the final boss is her perception of what it would look like.
It may represent Travis's own personal demon.
However, according to Silent Hill, and Silent Hill 3, Dahlia has called Alessa the demon, suggesting that this creature might be the manifestation of what Dahlia thinks or sees of Alessa.
There has also been speculation that Alessa's Dream is Xuchilbara, the Red God, himself. This is supported by not only the fact he is clearly a vibrant red, but most importantly its origin from within the Flauros and the memo found directly prior to the boss fight with it. The memo speaks of the Flauros and at first calls it a cage for a demon, however, states at its end that some believe the contrary, calling it a cradle for a divine god in opposition to a source of malevolence. Its placement directly before the final boss fight may allude to this identity.