How is tissue fluid formed and returned to the circulatory system?

At the arterial end of a capillary the blood is under a fairly high pressure. This hydrostatic pressure 'squeezes' a fluid called tissue fluid out of the pores in the walls of the capillary (fenestrations). Tissue fluid is plasma without the larger plasma proteins as they are too large to pass through the fenestrations. The cells surrounding the capillary are bathed in this tissue fluid and necessary materials are exchanged by direct diffusion between the cells and tissue fluid.
As blood moves along capillary the proteins become more concentrated due to loss of water, thus lowering the water potential of the blood. The water in the tissue fluid moves back into the capillary by osmosis due to a water potential gradient between the tissue fluid and the blood. Any remaining tissue fluid is called lymph which is drained into the lymphatic system and is eventually returned to the blood.