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Fortress Investment Group LLC confirmed Tuesday that it will close its flagship macro hedge fund and principal Michael Novogratz will retire after the fund suffered heavy losses and redemptions.

The fund will return all capital to investors by the end of the year. The Wall Street Journal reported the closure plans on Monday.

Fortress's macro fund was launched in 2002 to bet on global macroeconomic shifts by trading equity, debt, commodity and currency markets, but is down 17.5% so far this year through September, according to a regulatory filing.

The fund has been hurt by investments in Brazil, a market that has come under pressure in recent months, among other areas, an investor said. Macro funds on average have lost 0.6% this year through September, according to research firm HFR.

The Fortress fund manages about $1.6 billion today, down from more than $8 billion in 2007.

In conjunction with his retirement, Fortress will redeem all of Mr. Novogratz's shares in the company, valued at about $310 million at Monday's close, at a 17% discount. That buyback will reduce its dividend-paying share count by about 13%.

Mr. Novogratz, one of the four principals who run Fortress, earned more than $140 million in Fortress's final two years as a private company and became a billionaire on paper when Fortress went public in 2007.

The closure of the Fortress fund highlights a lackluster run for the hedge-fund industry. Hedge funds are down an average 1.4% in 2015, through September. That beats the 5.3% total loss by the S&P 500 in that time frame. Hedge funds tout their ability to produce steady returns in almost any environment, and their lagging of the bull market over the past several years has caused some clients to take a harder look at their value.

Some macro funds blame their challenges on an investment environment they say isn't ripe for their strategy. Central banks in the U.S. and Japan have kept interest rates steady, creating fewer opportunities to profit from moves, they say. Meanwhile, many funds have failed to profit from large selloffs in markets including China and Brazil.

The Fortress fund run by Mr. Novogratz has been in a serious slump for over a year. Last year, the fund lost 1.6%, compared with a gain of 5.6% for the average macro hedge fund, according to HFR. Wagers against U.S. government bonds and the Japanese yen cost the fund, among other moves.

Fortress has spent over a year trying to turn around the fund, which has shrunk to well under 5% of Fortress's assets under management and earnings. In July, Mr. Novogratz assumed control of the fund after previously sharing it with Jeff Feig, a former Citigroup Inc. senior executive who subsequently departed the firm. The firm disbanded its model of employing five portfolio managers to helm the fund, which was down 10% for the year at the time, in favor of Mr. Novogratz running the fund alone.

But the fund continued to bleed money over the past three months due to poor currency trades, among other things, these people said. Early this year, the fund suffered when Switzerland's central bank surprised the market and scrapped the peg of the Swiss franc against the euro, sending the franc climbing in value and hurting those like Fortress that had bet against the Swiss currency. Mr. Feig was behind that trade, investors say.

Write to Juliet Chung at juliet.chung@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com

Corrections & Amplifications: Hedge funds are down an average 1.4% this year through September, beating the 5.3% total loss by the S&P 500 in that time frame. An earlier version of this story incorrectly said hedge funds were down an average 3.8% for the year through September, compared with a 6.4% loss by the S&P 500. Those figures were for the third quarter. (Oct. 13)

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October 13, 2015 13:05 ET (17:05 GMT)

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