Aug. 7 (Bloomberg) -- Jim Pallotta, head of equities for hedge-fund manager Paul Tudor Jones, is leaving to start his own firm after 15 years as his stock picks underperform the market.

Pallotta will keep the $5 billion Raptor Global Fund he runs from Boston after the Jan. 1 split from Jones's Tudor Investment Corp. The 50-year-old manager also will continue to run the smaller Altar Rock funds as well as pieces of Tudor's main BVI Global Fund Ltd.

``Tudor will support Jim in the creation of his new firm and anticipates that it will invest capital in new funds Jim launches,'' said the Aug. 6 letter signed by Jones, Pallotta and Mark Dalton, Tudor's president. The Greenwich, Connecticut-based firm oversees $18 billion for clients.

Jones, 53, told investors in an October letter that BVI's below-average returns in 2007 had prompted his firm to discuss shifting money among strategies and building a ``more dynamic hedging program'' to protect investments during volatile markets. Tudor also was considering ``the potential need for an asset reduction,'' according to the letter.

Between 30 percent and 40 percent of Tudor BVI's portfolio has historically been invested in global equities, with the U.S. portion managed by Pallotta and his team.

Tudor spokesman Shawn Pattison declined to comment.

The Raptor fund, which focuses on companies Pallotta considers undervalued, has dropped 21 percent since May 2007, compared with the 15 percent decline in the Standard & Poor's 500 Index.

BVI Gains

Raptor fell 6.6 percent this year through July 23, while the BVI fund is up 2.3 percent. BVI, which trades stocks, bonds, currencies and commodities, has posted average returns of 23 percent a year since October 1986, one of the best long-term track records in the $1.9 trillion hedge-fund industry.

Hedge funds are in the midst of the industry's worst start to a year in almost two decades, according to Chicago-based Hedge Fund Research Inc. HFR's Global Hedge Fund Index dropped 2.8 percent in July, its biggest monthly drop in five years, and has declined 3.8 percent so far this year.

Pallotta opened Raptor in August 1993, and has posted an annualized return of 16 percent since then, compared with 9 percent for the S&P 500.

Before joining Tudor, Pallotta worked for almost a decade at Essex Investment Management Co. in Boston, a firm that manages money for individuals and institutions.

While at Essex, he met Jones, now 53, for what was supposed to be a half-hour breakfast. The discussion lasted two and a half hours as the two men discovered they had similar trading philosophies. Pallotta, who grew up in Boston where his father worked three jobs, joined Tudor soon after. He is a co-owner of the Boston Celtics, which won the National Basketball Association championship this year.

Pallotta's new firm will initially focus on publicly traded stocks. In the future he plans to add new funds including ones that invest in private companies, the letter said.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: August 7, 2008 09:42 EDT