The Carlyle Group suffered yet another casualty in the current credit freeze after the sub-prime mortgage crisis when it was forced to liquidate its $600-million first and only hedge fund because it had failed to achieve "critical mass". This marks the second successive failure for the group in as many weeks after the Chinese government scuttled its earlier attempt to invest in a local machinery firm. (See: China vetoes Carlyle's acquisition of machinery maker Xugong Group)

The ill-fated Blue Wave Partners Management was set up just months before the credit crunch hit last year. It is thought to be the firm's first investment failure since Carlyle Capital Corporation, its Dutch affiliate, collapsed under a $22-billion mortgage securities debt burden in March. (See: Carlyle Group faces default on $21.7-billion sub prime assets)

Carlyle started the multi-strategy fund in April 2007 with two former Deutsche Bank executives, Rick Goldsmith and Ralph Reynolds. The fund, which invested in both equity and credit, hit $900-million at its peak. But it became a classic victim of the spiralling debt crisis that took root last June. Asset values fell and investors headed for the exit. Even the launch of an equity-only share class failed to save Blue Wave.

The equity-focused part of the Blue Wave hedge funds is up more than 2 per cent so far this year, in comparison to the S&P 500 that was down 12 per cent. However, Carlyle said that the funds started in a "challenging" market last year and haven't been able to raise assets under management to a level that will generated enough fees to cover the costs of running a big multi-strategy hedge fund business.

Carlyle Blue-Wave "today announced that it has voluntarily decided to end its multi-strategy investment programme and to begin liquidating positions in an orderly manner in anticipation of an eventual closing of the Carlyle Multi-Strategy Partners (CMSP) funds," the private-equity firm said in a statement on its Web site.

"Investors have been informed that the funds have begun to liquidate their portfolio in an orderly manner," the firm added, saying that it was not big enough to sustain a multi-strategy fund, which is labour and systems-intensive.

Some 41 staff will lose their jobs as a result of the forced liquidation.

It comes as hedge funds worldwide struggle against deteriorating market conditions to meet performance targets and keep their investors on board. The asset class posted a loss of almost 1 per cent in the first half, Hedge Fund Research, the Chicago-based research firm said earlier this week.

The Carlyle Group is a global private equity investment firm, based in Washington, DC, with more than $81.1 billion of equity capital under management. The firm operates four fund families, focusing on leveraged buyouts, venture & growth capital, real estate and leveraged finance investments.

The firm employs more than 575 investment professionals in 21 countries with several offices in North America, South America, Europe, Asia and Australia; its portfolio companies employ more than 286,000 people worldwide. Carlyle has over 1200 investors in 68 countries. Being unlisted, its revenue figures are unavailable to the public.

A hedge fund is a private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets, and participate substantially in profits from money invested. It charges both a performance fee and a management fee.

Typically open only to qualified investors, hedge fund activity in the public securities markets has grown substantially, accounting for approximately 10 per cent of all US fixed-income security transactions, 35 per cent of US activity in derivatives with investment-grade ratings, 55 per cent of the trading volume for emerging-market bonds, and 30 per cent of equity trades. Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt.

As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.