XFLT's Boardroom War: A High-Stakes Battle Over Performance and Control

CHICAGO, IL – July 16, 2026 – The machinery of fund governance is grinding loudly at the XAI Floating Rate & Alternative Income Trust (XFLT), where a bitter dispute has erupted into a full-blown proxy war. The fund’s Board has already approved the termination of its sub-adviser, Octagon Credit Investors, and the fund’s manager, XA Investments LLC (XAI), is now urging shareholders to approve the installation of a new team from King Street Capital Management. The move comes after what XAI describes as a disastrous performance record, including a staggering 54% erosion of the fund's Net Asset Value (NAV) since inception. With a critical shareholder meeting looming on July 30, investors are caught in the crossfire of competing narratives, each side vying for control of the fund's future.

At the heart of the conflict is a fundamental question of accountability. XFLT's Board of Independent Trustees argues it is exercising its fiduciary duty to protect shareholders from an underperforming manager. The terminated sub-adviser, however, paints a picture of a board deflecting blame for its own poor structural decisions. This battle offers a rare, unvarnished look at the power dynamics that define modern asset management, where performance is paramount and loyalty is fleeting.

The Case for a New Sub-Adviser

XAI and XFLT’s board have laid out a damning case against Octagon. Their central claim is that Octagon's investment decisions are directly responsible for the fund’s NAV collapsing by 54% since its 2017 inception. To bolster this argument, they point beyond XFLT to what they term Octagon’s “persistent underperformance across CLO strategies.” In a sharply worded public letter, XAI highlighted that Octagon's own Collateralized Loan Obligation (CLO) portfolio “has suffered an extraordinary seven CLO defaults in 2026 that wiped out entire classes of investors in those funds.”

This is not mere corporate rhetoric. Research confirms that S&P Global Ratings downgraded seven classes of notes from five different Octagon-managed CLOs to 'D (sf)' in June, signifying default. The rating agency noted that upon liquidation, the assets were insufficient to repay the notes in full. For the XFLT board, this external evidence solidified the need for what they call “necessary and decisive action.”

The board insists its selection of the King Street Sub-Adviser, an affiliate of the $30 billion global investment firm King Street Capital Management, followed a “comprehensive process.” They champion King Street’s deep experience in credit markets and its CLO platform, Rockford Tower Asset Management, as the engine needed to reverse the fund's trajectory. XAI promises the new agreement will bring the “potential for increased distributions and enhanced performance” with no increase in fees. They have also dismissed a counter-proposal from Octagon, submitted after its termination, stating it would be “imprudent to provide a pay increase and entrust a higher degree of responsibility to a failed sub-adviser.”

A Manager Fights Back

Octagon Credit Investors, a firm managing over $32 billion, has refused to go quietly. In a series of its own letters and proxy filings, the firm vehemently rejects the narrative of underperformance. Octagon contends that under its management, XFLT outperformed its closest peers on both total shareholder return and NAV return since inception. They point to a five-star Morningstar Rating received in 2025 and a nomination for Creditflux's Best Public Closed-End CLO Fund in 2026 as proof of their competence.

According to Octagon, the fund's poor performance and deep trading discount to NAV are not the fault of its investment strategy but rather the consequence of decisions made by XAI and the XFLT Board. Octagon specifically cites an “excessively high fee structure,” a “risky capital structure,” and cuts to distributions as the true culprits. From their perspective, the board is scapegoating its sub-adviser to avoid accountability for its own governance failures.

In a direct challenge to the board, Octagon has presented shareholders with a “Better Path Forward.” This alternative plan involves Octagon assuming the role of primary adviser, cutting the overall management fee from 1.7% to 1.3%, and taking active steps to close the NAV discount through share repurchases or a tender offer. Octagon claims these recommendations were “repeatedly disregarded” by the board, which instead chose a path that allows XAI to retain a larger slice of the management fee by hiring a cheaper sub-adviser. The firm is now actively soliciting votes against the board’s proposal on a BLUE proxy card, turning the shareholder meeting into a referendum on the fund’s entire management structure.

A New Engine or a Different Problem?

Shareholders are being asked to place their faith in King Street Capital Management, a firm with a formidable reputation in credit and distressed debt. Its CLO affiliate, Rockford Tower, launched in 2017, has managed over $12 billion and earned industry accolades for performance in 2019 and 2020. The XFLT board is betting that this expertise can be the cure for the fund's ailments.

However, recent developments cast a shadow over this proposed solution. On July 16, reports emerged that King Street itself is facing performance headwinds. The firm has limited redemptions from its flagship hedge fund amid declining assets and a 0.5% loss in the first half of 2026. While its CLO strategies represent a significant part of its business, the struggles in its main fund raise questions about the firm's current footing. For XFLT shareholders, this introduces a new layer of risk: are they swapping a known problem for an unknown one?

The complexity of the situation is further compounded by the involvement of activist shareholder Bulldog Investors. Holding a significant stake, Bulldog has announced its intention to vote against the new sub-adviser. Their goal is not to defend Octagon, but to force the board's hand on a more radical solution: liquidating the fund entirely to allow shareholders to cash out at NAV. Bulldog points out that XFLT was originally a “term trust” intended to wind up in 2029 before being converted to a perpetual fund, arguing that the board has failed to deliver value under the current structure. Ultimately, this leaves shareholders with a binary choice on the WHITE proxy card: approve the King Street deal, or reject it. While Octagon has pitched an alternative path and activists are advocating for a "no" vote to force a potential liquidation, neither of those alternative options is actually on the ballot at the Special Meeting.

Editorial Note: An earlier version of this article incorrectly stated that shareholders were voting to approve the termination of Octagon Credit Investors, and characterized the proxy vote as a three-way battle. The article has been updated to clarify that the XFLT Board has already approved Octagon's termination, and the upcoming Special Meeting vote is strictly a binary choice for shareholders to either approve or reject the installation of the new King Street sub-adviser.