July 31 (Bloomberg) -- Carlyle Group, the world's second- largest private-equity firm, is liquidating its Blue Wave hedge fund after assets fell by a third during the credit-market collapse.

Blue Wave, a joint venture started last year with former Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds, is the second Carlyle-affiliated fund to close this year. Carlyle Capital Corp., an Amsterdam-listed fund, collapsed in March after defaulting on $16.6 billion of debt.

``This is an orderly liquidation to ensure fair and equitable treatment of all investors,'' Chris Ullman, a spokesman for Washington-based Carlyle, said today in an interview. The firm has money in the fund, which was free to follow multiple investing strategies.

Blue Wave, whose assets dropped to about $600 million from $900 million when it opened in March 2007, was hurt by investments in debt and residential mortgage-backed securities shortly before record U.S. subprime-mortgage defaults sparked a global credit crisis. The fund returned 2 percent this year after falling 10 percent in 2007.

``Hedge funds have been building their organizations assuming a reasonable growth rate,'' said Scott Baker, principal of Greenwich, Connecticut-based Cook Pine Capital LLC, which constructs hedge-fund portfolios for wealthy clients. ``With both of those assumptions being challenged, managers are being forced to realign their organizations with the reality of the day.''

No Critical Mass

The fund failed to gain ``the critical mass of assets under management necessary to support a multistrategy fund infrastructure,'' the firm said today in a statement. The fund would have had to return 9 percent before it could charge investors performance fees of as much as 20 percent.

Multistrategy funds have returned an average of 4.8 percent since March 2007, according to an index compiled by Credit Suisse Tremont Index LLC.

Carlyle, founded in 1987 by David Rubenstein, William Conway and Daniel D'Aniello, manages about $81 billion in assets in buyout, venture capital and leveraged-finance funds. The firm has pushed into new markets overseas including Asia and the Middle East.

Amid a 70 percent decline in announced transactions for the industry, Carlyle has announced deals including the $2.54 billion acquisition of Booz Allen Hamilton Inc.'s government consulting business. That transaction was completed today.

Blackstone Group LP, based in New York, is the world's biggest private-equity firm.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: July 31, 2008 17:44 EDT