By Greg Roumeliotis and Michael Flaherty

(Reuters) - Starboard Value LP, the activist hedge fund that had pressured Macy's Inc (M.N) to separate its real estate from its retail business, has sold its stake in the U.S. department store operator, people familiar with the matter said on Wednesday.

The move gives Macy's incoming Chief Executive Officer Jeff Gennette more space to execute on the company's turnaround plan. It comes after an acquisition approach by Canada's Hudson's Bay Co (HBC.TO), the owner of the Lord & Taylor and Saks Fifth Avenue retail chains, failed to materialize into a concrete offer for Macy's.

The sources asked not to be identified because the matter is not public. Starboard, which owned almost 1 percent of Macy's as of the end of December, declined to comment. Macy's did not immediately respond to a request for comment.

Macy's had been reluctant to heed Starboard's call to extract cash from its real estate, including some of its trophy assets, such as its Herald Square department store in New York, the location for the Christmas movie "Miracle on 34th Street."

This is because it views the rent from sale leasebacks, in which it sells its real estate only to lease it back, as another form of debt.

To be sure, Macy's has made some small moves to monetize its real estate. These include a joint venture with real estate investment firm Brookfield Asset Management Inc (BAMa.TO) for roughly 50 Macy's locations. Macy's is also shutting down several of its underperforming stores.

Macy's, which also owns luxury chain Bloomingdale's, is now in a period of transition as CEO Terry Lundgren is due to become executive chairman on March 23. He will be succeeded by Gennette, the company's president.

Reuters first reported earlier this month that Hudson's Bay's bid for Macy's stumbled because it could not line up equity financing.

Hudson's Bay is now considering a merger with debt-laden department store operator Neiman Marcus, though that deal is also fraught with challenges, sources said earlier this week.

Starboard owned approximately 3 million Macy's shares worth around $107.8 million as of the end of December, according to the fund's most recent public disclosure of its position. Macy's shares have dropped almost 60 percent since Starboard unveiled a position in the company in July 2015.

Starboard's retreat underscores the challenges facing the retail sector, as a glut of new stores combined with consumers increasingly turning to the internet for their shopping needs has led to many companies bleeding cash, and some even filing for bankruptcy.