Carlyle, the US private equity giant, has suffered a setback after it was forced to liquidate its $600 million first and only hedge fund because it had failed to achieve "critical mass".

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.

Carlyle's high profile executives - David Rubenstein, Daniel D'Aniello and William Conway - lost money on CCC.

Partners and senior staff at Carlyle were also personally invested in Blue Wave. It is likely that they have lost money alongside other backers.

Carlyle launched Blue Wave, in which it is a "significant minority" owner in April 2007, having brought in two 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-only portion is up 2 per cent over the year so far - against an S&P 500 that was down 12 per cent at the end of the first half.

In the end, Carlyle chose to liquidate the funds, shutting the door on redemptions and selling off assets to the best bid.

“This is an orderly liquidation to ensure fair and equitable treatment of all investors,” a Carlyle spokesperson said.

He said Blue Wave was not big enough to sustain a mult-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 deteriorationg market condtions 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.

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