Dec. 14 (Bloomberg) -- Tudor Investment Corp. clients pulled more than $1 billion from its Raptor hedge fund after manager James Pallotta lost 8.5 percent this year, mostly on U.S. equities, according to two of the firm's investors.

Raptor, which Pallotta runs from Boston, had about $8 billion in assets before the withdrawals. The fund dropped 3.1 percent in November.

Tudor's biggest fund, BVI, rose about 5.5 percent through November, about half the industry average. Paul Tudor Jones, who founded the Greenwich, Connecticut-based firm in 1980, considered reducing BVI's $10 billion in assets to help improve performance, according to an Oct. 25 client letter obtained by Bloomberg.

``There is an intense focus here on posting a better 2007 return than our current level,'' Jones wrote in the letter.

Jones, 53, had about $19 billion in assets before the recent redemptions. Raptor has posted an average annual return of 19.2 percent since opening in October 1993, almost double that of the Standard & Poor's 500 Index. BVI has increased 24.2 percent a year on average since 1986.

``It's a question of evaluating the validity of their stock-picking themes in this environment,'' said Mathieu Klein, chief executive officer of Paris-based investment adviser Darius Capital Partners, which isn't a Tudor client. ``This isn't necessarily a vicious circle, because if returns pick up, investors will stick with them.''

Shawn Pattison, a Tudor spokesman, declined to comment.

November Returns

The average hedge fund lost 1.4 percent in November, trimming the gain this year to 10.2 percent, according to Chicago-based Hedge Fund Research Inc. Macro funds such as BVI, which bet on swings in stocks, commodities, interest rates and currencies, lost 0.3 percent, reducing their average year-to- date return to 10.9 percent.

Pallotta, 49, buys stocks he expects to rise while hedging trades with short sales. In a short sale, an investor sells borrowed stock in expectation of repaying the loan with shares repurchased at a lower price.

Managers with a similar strategy lost 2.4 percent on average in November, cutting their 2007 advance to 10.4 percent, according to Hedge Fund Research.

The fund fell 8 percent through Aug. 15 as Pallotta's hedges failed to offset losses during a global equities selloff. Swings in stock prices ``simply crushed'' the fund's ``core longs,'' or stocks that Raptor managers expected to rise, according to an Aug. 21 client letter obtained by Bloomberg.

Volatility Rises

Stock-market volatility in August doubled to its highest level since April 2003, as measured by the benchmark VIX Index. Simultaneous selling by many fund managers triggered declines in stocks and bonds.

BVI lost 5.3 percent during the third quarter, lowering its 2007 gain to 2.5 percent as of Sept. 30, according to the client letter. The fund doubled that gain over the next three weeks to 5 percent, ``well below our targeted net return of mid to high- teens,'' Jones wrote. The fund lost an additional 2.7 percent in November.

BVI's below-average returns this year prompted its managers to discuss shifting money among strategies and building a ``more dynamic hedging program'' to protect investments during times of unexpected market movements, the October letter said. Tudor also said it was considering ``the potential need for an asset reduction.''

`Macro' Investing

BVI's investments are overseen by about 55 portfolio managers. About half of the fund's capital is allocated to so- called macro bets, which are focused on broad economic trends. Another 40 percent of the capital is invested in equities with a concentration on U.S., European, Asian and emerging markets.

During the past three years, ``BVI has shown an average fourth-quarter net return of close to 7 percent,'' Jones said in the letter.

Losses at BVI from its U.S. stock-selection strategy, which is overseen by Pallotta, contributed the most to the fund's third-quarter decline. Returns also were hurt by global stock bets made using computer-trading models.

Following July and August losses brought on by ``turmoil in the credit markets, subprime worries and massive delevering of quantitative equity strategies,'' all strategies were profitable in September, Tudor told investors.

Celtics Co-Owner

Tudor is the largest investor in BVI, with the firm's proprietary capital accounting for about 35 percent of assets since it was folded into the fund in July.

Prior to joining Tudor, Pallotta was a principal portfolio manager with Boston-based Essex Investment Management Co., where he worked for 10 years. He is a part owner of the Boston Celtics professional basketball team.

In June, Tudor told investors in its Witches Rock Fund Ltd. overseen by Pallotta that it was shutting the $550 million small-company stock fund after investment prospects declined and returns fell short of expectations.

Witches Rock managers were ``frustrated with the lack of viable ideas in the small-cap arena,'' Pallotta said in a June 5 letter to investors. The firm refunded clients' money including $25.3 million in performance fees collected since December 2004, when Witches Rock opened.

The fund returned almost 24 percent net of fees since inception, according to the client letter. That compared with gains of 31 percent by the S&P 500 Index and 35 percent by the Russell 2000. The fund's net return rose to 30 percent with the refunded fees.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Managers typically charge management fees of 2 percent of assets and a performance fee of 20 percent of investment gains.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: December 14, 2007 16:13 EST