Pallotta shutting his hedge funds

Pallotta, an investor in the Boston Celtics, had started Raptor Capital Management in January after 15 years at Tudor Investment Corp., a giant investment firm based in Greenwich, Conn. He lost money in his last two years at Tudor and his performance this year was "roughly flat," he told clients in a letter yesterday. He said he will take a brief break from the business, according to the letter, a copy of which was obtained by the Globe.

In the letter, Pallotta wrote that he will "step back from day-to-day investing for a few months" to develop a strategy to "capitalize fully on the next several years' developing investment opportunity set." He said his company will continue to exist.

He declined to be interviewed.

Raptor's funds are but the latest casualty in the hedge fund industry following last year's stock market collapse. Also yesterday, another Boston hedge fund manager, George Noble, told The Wall Street Journal he plans to shutter his fund and return $550 million to investors. Noble was unavailable for comment late yesterday. The Journal also first reported Pallotta's closure.

Pallotta, 51, is a colorful figure on the Boston scene, a major player in philanthropic circles, and a fan of watching Red Sox games from the sought-after Green Monster seats at Fenway Park. Part of the city's financial elite, he came from humble roots in the North End and made his fortune as a money manager starting in 1983. He recently built a $21 million, 21,000-square-foot mansion in Weston and is a minority partner in the Celtics.

After years of providing his investors with superior returns, Pallotta appears to have felt the weight of sharp declines in 2007 and 2008 while he was still at Tudor. He reported a loss of 20 percent last year, compared with his longer-term average return of 13.9 percent a year, from 1993 through May 31 of this year, according to his letter. He handily beat the Standard & Poor's 500 Index over that period, which returned 6.5 percent annually, by both buying stocks long and shorting them, or betting they will fall.

Last year's loss was not as disastrous as the general market's performance. But in the hedge fund world, the goal is to never lose money: Managers generally earn a fee plus 20 percent of the profits they make for their clients. If the clients don't make money, neither do they. And after a loss, they in essence have to make investors whole before they start taking their usual cut again. Pallotta had become so pessimistic about the markets that he was almost entirely in cash this year, according to a person briefed on the firm.

Pallotta faced an additional hurdle as he evaluated whether to keep running the fund. Normally a stock investor, he had accumulated a number of illiquid positions in private companies that don't have publicly traded stocks, according to people who know him and do business with him. The market for private holdings all but shut down over the past year, meaning such holdings can be sold only at a loss - or held until the market improves. And those private holdings appear to account for about one-quarter of the portfolio.

Indeed, Raptor will return only about 75 percent of client funds in cash, starting in July. Another 15 percent of the money will come in the form of slices of those troubled private investments. The other 10 percent will be tied up for longer. He said the money will be returned "as soon as is practicable thereafter."

But Pallotta sought to assure investors that he will be back.

"I am no less passionate about investing and trading today than I was 22 years ago," he wrote. "In fact, quite the contrary is true."

Beth Healy can be reached at bhealy@globe.com.