NEW YORK (Bloomberg) — A doubling in currency volatility since June has knocked the "carry trade" off its perch as the most profitable strategy in foreign exchange, hurting investors from John W. Henry & Co. to Campbell & Co.

In one of the more popular carry trades, a US investor who borrowed in yen to buy high-yielding Australian dollars enjoyed a return of 11 percent this year through June 5, data compiled by Bloomberg show. The gains have since been wiped out.

Chalk up another victim to the spreading US subprime mortgage contagion.

The fallout from losses on loans made to people with poor credit is spreading so fast that investors are selling any asset smacking of high risk around the globe, causing wide swings in exchange rates that weren't anticipated.

New York-based JPMorgan Chase & Co.'s index of volatility on options for the most-traded currencies reached 13.4 percent last week, the highest since 1999.

"We were caught off guard," said Terri Becks, president and chief operating officer of Towson, Maryland-based Campbell. "When these anomalies in the market happen, in this case how highly correlated moves in many markets were, you are either on the right side or the wrong side.

" This time we were definitely on the wrong side" in currencies, interest rates and equities.

Campbell's biggest fund, with $9 billion in assets, lost 10.8 percent in July, the most since 1990. John W. Henry's $122 million Financial and Metals Portfolio fell 11.7 percent in July, its worst month since March.

Rising currency volatility is bad for investors in the carry trade because it increases the risk that gains from interest-rate differentials will be erased by foreign-exchange losses.

The JPMorgan volatility index fell the past two years, reaching a record low of 5.76 percent on June 8.

In currencies, Boca Raton, Florida-based Henry's largest loss in July was in the yen, Kenneth Webster, president and chief operating officer, said in a statement on its Web site.

Assets at the firm, which is owned by John W. Henry, who also controls the Boston Red Sox baseball team, have plummeted by 75 percent since November to $479 million.

"The turmoil in the credit markets had a collateral effect on the currency markets as investors bought back short positions in low-yielding currencies," Webster wrote. He declined to comment beyond the statement on the Web site.

A short position is where an investor has trades set up that would profit from a decline in the value of a currency.

Investors who hoped for a rebound in the carry trade this month are likely disappointed. The Australia dollar has lost 15 percent since it reached 107.74 yen on July 20, the highest since 1991, as investors sold the currency and bought back yen.That helped push Japan's currency to a 14-month high of 111.61 per US dollar on August 17.

"I don't think that the unwind of the carry trade is over by a long shot," said Naomi Fink, senior currency strategist at BNP Paribas SA in New York. "The subprime issues remain."

Rising delinquencies on subprime mortgages forced two hedge funds managed by New York-based Bear Stearns Cos. to file for bankruptcy last month, while BNP Paribas SA in France halted withdrawals from three funds because it couldn't "fairly" value their holdings. The Federal Reserve last week cut the rate it charges banks by half a percentage point to 5.75 percent in an attempt to avert a credit crunch and restore investor confidence.

"The herd is stampeding, and somewhere it will stop," said Harry Markowitz, winner of the Nobel Prize in economics in 1990 and now a finance professor at the Rady School of Management at the University of California, San Diego. "The news will pass and things will start to settle down again."

In the carry trade, investors borrow in countries with low interest rates, like Japan, and invest the proceeds in the currencies of countries such as Australia, New Zealand and South Africa with high rates. They profit on the difference. Overnight lending rates in Japan average 0.5 percent, compared with 6.5 percent in Australia and 8.25 percent in New Zealand.