We surveyed genetic variation in alr2, an allodeterminant of the colonial hydroid Hydractinia symbiolongicarpus. We generated cDNA from a sample of 239 Hydractinia colonies collected at Lighthouse Point, Connecticut, and identified 473 alr2 alleles, 198 of which were unique. Rarefaction analysis suggested that the sample was near saturation. Most alleles were rare, with 86% occurring at frequencies of 1% or less. Alleles were highly variable, diverging on average by 18% of the amino acids in a predicted extracellular domain of the molecule. Analysis of 152 full-length alleles confirmed the existence of two structural types, defined by exons 4-8 of the gene. Several residues of the predicted immunoglobulin superfamily-like domains display signatures of positive selection. We also identified 77 unique alr2 pseudogene sequences from 85 colonies. Twenty-seven of these sequences matched expressed alr2 sequences from other colonies. This observation is consistent with pseudogenes contributing to alr2 diversification through sequence donation. A more limited collection of animals was made from a distant, relict population of H. symbiolongicarpus. Sixty percent of the unique sequences identified in this sample were found to match sequences from the Lighthouse Point population. The large number of alr2 alleles, their degree of divergence, the predominance of rare alleles in the population, their persistence over broad spatial and temporal scales, and the signatures of positive selection in multiple residues of the putative recognition domain paint a consistent picture of negative-frequency-dependent selection operating in this system. The genetic diversity observed at alr2 is comparable to that of the most highly polymorphic genetic systems known to date.