HONG KONG, Nov 30 (Reuters) - Many of Asia's hedge fund managers who pivoted from China's languid markets to Japan's soaring stocks in 2023 have struggled to make money, hamstrung by a lack of local insight and having no playbook to unlock the world's third-largest economy.

Fund managers reduced exposure to China and swerved to Japan as the Tokyo stock market surprised with a 28% rally this year. Japan-focused funds launched in 2023 surpassed China ones for the first time in 17 years, according to data and research firm Preqin, with 18 aimed at Japan and 13 at China.

Goldman Sachs data also shows Japan's stock market has seen the largest hedge fund inflows globally this year, part of the reason the Nikkei Average index hit a 33-year peak.

Yet the transition to Japan's developed but inefficient capital markets has proved challenging after 15 years of trading China's markets, where high growth meant even passive exposure yielded rich returns.

Japan requires traders to have a deep understanding of its cash-rich multinationals and lesser-known small businesses, corporate reforms and shareholder activism, fund managers say. One has to be selective, spot mispricing opportunities, and identify activism targets, they said.

"If you try to apply the same beta-seeking philosophy (of China long-biased funds) to Japan, you are going to see a lot of pain," said Leonard Umantz, head of manager & strategy research at Rogers Investment Advisors KK in Tokyo.

The average returns for Japan-focused equity long-short funds were only 5% for the first 10 months, while those for broader pan-Asia equity long-short funds fell 3%, data from Eurekahedge shows.

In comparison, Japan-focused event-driven hedge funds - taking in special situations like mergers and acquisitions and activist investor campaigns - jumped 10% in the first 10 months. Singapore-based $2.9 billion FengHe Group, for example, increased the exposure of its flagship fund to Japan to 28% and reduced China to 8% by end-September this year, according to an investor letter reviewed by Reuters.

FengHe's Asia Fund was up only 1.4% for the first nine months, with gains coming mainly from long positions in Chinese companies, such as New Oriental Education & Technology Group , Alibaba Group Holding Limited and Luckin Coffee . In contrast, its short positions in Toyota Motor Corp were a drag on performance.

A FengHe spokesperson said the fund had made adjustments following a review, helping increase its gains for the year so far to 5.5% by late November, adding that the fund's positions are not a reflection of the company's macroeconomic views.

Another pan-Asia hedge fund, Kaizen Capital Partners, whose largest exposure is in Japan, had low double-digit losses by end-October, according to an investor familiar with the fund's performance. Kaizen did not reply to requests for comment.

Patrick Ghali, managing partner of hedge fund advisory Sussex Partners, said this year's rally in Japan had been narrow and "managers that weren't exposed to very specific companies and sectors didn't capture this upside."

Hedge fund advisors point to other challenges such as uncertainties over Japan's interest rate policy and a scarcity of local analysts as global funds hone in on a long-ignored market.

Market participants expect growing investor interest in Japan as the country emerges from deflation and serves as an alternative to China. They also expect activist and event-driven managers rather than equity long-short funds to be winners as corporate reforms gather pace.

"There are so many structural reforms happening (in Japan), the environment is the best that's ever been in terms of special situations," said Jon Withaar, who manages an Asia special situations hedge fund at Pictet Asset Management.

The fund's Japan exposure is about 70%. Pictet does not disclose its fund performance.

(Reporting by Summer Zhen; Editing by Vidya Ranganathan, Sam Holmes and Tom Hogue)