A fierce dispute over the future management of the XAI Octagon Floating Rate & Alternative Income Term Trust has erupted ahead of its special shareholder meeting. The current sub-adviser, Octagon Credit Investors, issued a formal statement on July 14, accusing the XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) board of attempting to shift blame for the fund's poor performance in a "disingenuous" manner and urging shareholders to vote against a proposal to appoint a new sub-adviser at the July 30 meeting.

The Core of the Dispute

The conflict stems from the board's decision to replace the sub-adviser. According to the board, the change is in shareholders' best interests due to the fund's underperformance against its benchmark, significant net asset value erosion, and high turnover among Octagon's senior personnel. The board has selected Rockford Tower Asset Management, a new entity from King Street Capital Management, as the replacement. The board emphasizes its authority as an independent overseer under the Investment Company Act of 1940 to make such decisions, noting that the sub-adviser is not responsible for the fund's overall management and operations.

The Sub-Adviser's Rebuttal

Octagon has issued a strong rebuttal. Its statement asserts that the investment decisions for which it is responsible as sub-adviser have performed excellently. The unlevered returns of XFLT's underlying assets have met or exceeded relevant benchmarks. The fund's total return and NAV return rank in the top tier among its peers year-to-date and over the past 1, 3, and 5 years, and it received a Morningstar 5-star rating for 2025. Octagon contends that the fund's current discount to NAV is not a result of its portfolio management but is instead caused by board decisions—such as maintaining a high fee structure, cutting distributions, and implementing a risky capital structure—that have harmed common shareholders.

Alternative Proposal and Allegations

As an alternative, Octagon has proactively offered to take on the adviser role, proposing to reduce the fund's total management fee from 1.7% to 1.3% and to work on narrowing the discount to NAV. Octagon pointedly notes that Rockford Tower is a new entity with no experience managing a closed-end fund and that its parent, King Street, is facing its own performance challenges and staff departures. Octagon suggests the board's true motive for the change is to allow the current adviser, XAI, to earn higher profits by paying a lower fee to the sub-adviser while shareholders bear the same costs.

Shareholder Opposition and Ultimatum

Concurrently, a significant shareholder, Bulldog Investors, which holds 310,000 shares of XFLT, has announced it will vote against the new agreement. It argues the board's real failure was convincing shareholders in 2023 to convert the fund from a term trust to a perpetual structure, which it says led to the current share price collapse and deep discount. Bulldog Investors partner Phillip Goldstein stated, "We would change our position only if the board committed to providing shareholders with an opportunity to realize value at a price close to NAV." He warned that if shareholders reject the proposal, it should be viewed as a vote of no confidence in the board, prompting an immediate move to liquidate the fund.