* Hedge fund is reducing headcount by 6.5 pct
* Lasry's Avenue also to enter direct lending business
* Principal U.S., European hedge funds up more than 12 pct YTD
By Katya Wachtel
NEW YORK, Oct 4 (Reuters) - Marc Lasry's Avenue Capital Group hedge fund is downsizing and laying off roughly 6.5 percent of its staff, according to an employee memo reviewed by Reuters.
The $12.7 billion fund that specializes in distressed-debt investing is eliminating 16 jobs after bringing in a consulting firm to review the New York-based fund's overhead, efficiency and expenses.
Most of the employees losing their jobs are either in back-office or administrative positions. Two people who are part of the hedge fund's investment team are also being let go, a person familiar with Avenue said.
Avenue, founded in 1995 by Lasry and his sister Sonia Gardner, specializes in investing in distressed debt and equity. The firm has offices in a number of cities, including London, Beijing and Munich.
"Earlier this year we retained a consulting firm to conduct a review that was recently completed," Lasry and Gardner wrote in the memo, sent to staff last week. "One outcome of this process is that we are reducing Avenue's global workforce by approximately 6.5 percent," the memo said.
The layoffs come during a year the firm is rebounding from a disappointing 2011, when its flagship U.S hedge fund lost about 10 percent. The memo to staff said several portfolios are "generating double digit returns" this year, with that flagship U.S. fund up more than 12 percent through Oct. 3, according to a person familiar with the returns. The firm's principal European fund, which lost 3 percent last year, has risen almost 13 percent year-to-date.
The average hedge fund is up a little over 3 percent this year, while the Standard & Poor's 500 index is up 16 percent.
In the memo, Lasry and Gardner said Avenue will continue to make hires in other areas, singling out a new direct lending business.
In recent years, hedge funds have begun making loans to smaller companies, filling in some of the financing gap left by big banks that retreated from the business in the wake of the financial crisis. Hedge fund lenders often charge higher rates of interest than traditional lenders.
"We have recently added a senior member to the Avenue team to establish a direct lending business and expect to bring on additional professionals as this new business scales up," the memo said.
Lasry is a well-known name in the hedge fund industry and a prominent supporter of President Obama. In June, he hosted a fundraiser for Obama at his Upper East Side home.
He has remained a strong supporter of the administration, even after many in the $2 trillion hedge fund industry have thrown their support behind Republican challenger Gov. Mitt Romney.
Recently Lasry said the debt crisis in Europe presents some very appealing investment opportunities, and the firm recently closed a second fund focused on making investments in the troubled euro zone region. The $2.8 billion fund was oversubscribed, the memo said.
His hedge funds most recent 13-F regulatory filing revealed Avenue owns stock and warrants in General Motors and shares of CIT.