The eight-man event is considered the prime tune-up opportunity prior to Monday's start of the Australian Open, where the 22-year-old Raonic from Thornhill, Ont., has never been past the fourth round.
"It was a tough loss, conditions were difficult," said Raonic, playing the tournament for the second year. "I just wasn't able to execute like I needed to. The tiebreaker was a big disappointment.
"I had the match in hand and I wasn't able to keep it together, it's too bad."
Raonic, ranked 15th, was looking strong against Hewitt with a 3-0 lead in the final-set decider.
But Raonic's game faded in an onslaught of Hewitt winners as the 31-year-old tore it up in the tiebreaker.
The defeat puts Raonic into the relegation round of the hybrid competition.
"There are still matches here to play and it's a learning experience," said Raonic. "It's still good to get tough matches leading into the Open, which is the major goal."
Raonic and Hewitt duelled for an hour 45 minutes in conditions ranging from blinding sunlight to whipping wind, a trademark of the Kooyong venue which hosted the Australian Open until 1988.
The Canadian lost the opening set in 37 minutes from a double-fault which gave Hewitt a 5-3 lead.
The Canadian fought back in the second to level as Hewitt's game stalled.
Raonic has now lost twice to Hewitt after going out to the Australian at the third round of the Open a year ago.