Cruz is said to have been struggling to raise anything beyond the initial $200m she obtained from investors.
The decision to return investor money was made recently and all clients would get their money "promptly."
Cruz's hedge fund, which began raising money and recruiting employees in 2009 formally opened in 2010, was down 8 percent last year, according to sources close to the fund.
In 2007, Cruz was ousted from Morgan Stanley after a long tenure with the Wall Street firm. At time, she was one of the highest-ranking women in the securities industry.