A hurdy-gurdy is an instrument akin to combination of a grind organ, only in that it uses a crank to play, a violin, in that it's a bowed string instrument, the bow being attached to the crank and not a separate device, and a bagpipe, in that it has drones, albeit more strings instead of pipes. Seems perfectly reasonable for a music act to refer to one.

On the other hand, the song you're referring to, performed by the Butthole Surfers, was written by Donovan and seems to have nothing to do with hurdy-gurdies.