Ackman's Pershing Square Capital Management LP is selling its 39.1 million shares -- nearly 18 percent of Penney's stock -- to Citigroup Inc., which will offer the shares to other buyers, Penney and Ackman's $11 billion hedge fund said in separate statements.
The Plano, Texas, retailer, which will not receive any proceeds from the sale, did not list an expected selling price.
The Wall Street Journal said Citigroup would sell the shares at $12.90 each.
Penney shares closed at $13.35 Monday. Pershing Square paid an average $25 a share when it acquired its position, mostly in 2010 and 2011. The $12.90 selling price means the hedge fund will lose more than $600 million.
Ackman resigned from Penney's board Aug. 13 after an unusual public conflict with fellow directors over the choice of a chief executive.
The midrange department store chain brought former Chief Executive Officer Mike Ullman back as interim chief executive officer in April after former Apple Inc. executive Ron Johnson -- an Ackman favorite -- was ousted after 17 months.
Under Johnson's leadership, Penney's "performance deteriorated precipitously," Chairman Tom Engibous said in a statement Aug. 8 after Ackman, angry his choice was removed, demanded Penney's board replace Ullman by September.
Engibous responded, telling Ackman the board would conduct a "careful and deliberate process" to replace Ullman. He reminded Ackman the board backed Ullman with "overwhelming support" and pointed out Ullman had "led significant actions to correct the errors of previous management."
After receiving that response, Ackman demanded Penney's board oust Engibous, saying the board was "flying blind" under his leadership.
Penney was Ackman's third failure to turn around a retailer.
He started investing in now-defunct bookseller Borders Group Inc. in 2006, increasing his holdings two years later as the company tried to sell itself. He then promised to finance a buyout of larger rival Barnes & Noble Inc.
Borders filed for bankruptcy in early 2011. Barnes & Noble acquired Borders' trademarks and customer list, and Borders' former website now directs visitors to Barnes & Noble's site.
Ackman invested in discount retailer Target Corp. in 2007, proposing a variety of ways of boosting its share price. By 2009, he was engaged in a proxy battle, but gave up and sold out when shareholders sided with management.
Ackman conceded these "mistakes" in a letter to Pershing Square investors last week when he let them know he was considering selling his Penney stake.
"Clearly, retail has not been our strong suit, and this is duly noted," he wrote.
Ackman told CNBC last year he hoped to take an activist role in Procter & Gamble Co.