I have found using STUFF to create the output to be a little bit faster. I am assuming that it is due to traditional string concantination issues...

ALTER FUNCTION hex2alpha( @input VARCHAR(256) ) RETURNS VARCHAR(256) AS
BEGIN
    DECLARE @output VARCHAR(256); SET @output = SPACE(LEN(@input)/2)

    SELECT @output = STUFF(@output,a.dec+1,1,CHAR(b.dec))
    FROM 
        dec2hex AS a
        INNER JOIN dec2hex AS b ON b.hex = SUBSTRING(@input,a.dec*2+1,2)
    WHERE
        a.dec < LEN(@input)/2
    ORDER BY a.dec

    RETURN @output
END