Ken Griffin on US-China Tensions and AI

0:21Welcome to another episode of Goldman Sachs Exchange's Great Investors. I'm Raj Mahajan. I recently got the chance to catch up with Ken Griffin, the founder and CEO of Citadel at Goldman Sachs' Apex Symposium. Ken and I discussed the implications of AI, his approach to hedging portfolios, and the competitive landscape for the hedge fund industry. We hope you enjoy this conversation.

0:49Welcome back to Goldman Sachs, Ken. It is great to be here today. This is our third public conversation in the past seven years. I know you well enough to know you think way beyond the numbers and you're a student of leadership. So the first question I want to ask you is beyond the numbers for the past seven years, what are you most proud of as a leader in running Citadel? So two things jump out with that question. The first is we were extremely early to bring everybody back to work. And in some sense, it was almost countercultural to demand your team to come back to an office five days a week.

1:29And yet, I think that was an incredibly important part, not only of the success that you spoke of, but more importantly, of continuing to develop our human capital. I think as a country, the amount of human talent that has been underdeveloped because of working remotely has had a significant damaging impact on our economy. And recently, the Fed published a paper where they looked at factors that have caused reduced employment amongst those under the age of 30. And people would say, well, how much of this is the AI story? Well, it turns out that remote working is a more important factor to diminished employment opportunities for young Americans than AI.

2:13And so I'd say one of the things that I'm really proud of has been not only did we bring our team back to work, we publicly extolled what we thought were the strengths and virtues of doing so. And I think that history will be on our side. Humans are social creatures. We learn through apprenticeship. Mentors are really critical to our personal development and growth. And bringing people back into our four walls aggressively early both drove results for our limited partners, but more importantly, helped maintain the strength of our human talent at Citadel. That's one. The second is that during the start of the pandemic, actually literally as the first cases were happening in America, I was called by one of our former partners, who is the COO of a major New York hospital system, Dan Wadowski.

3:01And Dan called and said, we cannot get FDA approvals for drug trials in intensive care with those who are on ventilators who are facing imminent demise from COVID. I'm like, okay, Dan, why are you calling me? And he says, because there's no one else who I think can actually make this happen. Is Warp Speed? Actually, Warp Speed was the second part of this chapter. We moved in about 72 hours to get the FDA to approve experimental drug trials for those with COVID here in the United States. Amazing. And I'm really proud of my team that has worked hand in hand with government for decades to be able to rally resources around this existential moment in American history to help bring the full power of America's medical prowess to bear against a dreaded disease.

3:51Another dimension of this was the idea of Operation Warp Speed, which I discussed at length with Jared Kushner. That program saved ballpark half a million American lives. And understanding incentives, understanding how to minimize distances and supply chains. So with Operation Warp Speed, the key insight was pay big pharma to produce vaccines before they have the FDA results. You get a positive result from the FDA, the vaccine works, your time to market is going to be measured in days. Not first do your studies, wait for the FDA results, then move to manufacturing and lose three to six months.

4:35That was an incentives problem? That's an incentives problem, right? Because how do you get big pharma to spend potentially billions of dollars on producing vaccines, who ultimately may not work, and therefore will be literally flushed down a sewer system? So this was all about the US government taking the risk to fund the manufacturing of vaccines, the efficacy of which was not known. We spent a few billion dollars as a country. We saved a few trillion dollars in GDP. We saved roughly half a million American lives. It's extraordinary. So that's an extraordinary story that I think Citadel was a part of and I'm most proud of.

5:08It's amazing. The track record also was accomplished at the same time of multiple wars. You had this global pandemic. And so let's move it to the current moment where we are. We have a conflict in the Middle East. We have potential energy and inflationary implications from that. At the same time, the S &P is at the highs. The IPO window has opened up and there's a robust pipeline. As a capital allocator, how do you think about this moment in time? What's the market getting right? What's it mispricing? So big picture, not only is there a war in the Middle East, there's still a raging war in Europe.

5:46And the peace that you and I grew up with for most of our adult lives is clearly not on the table right now. And for anybody following the situation in Cuba, there's obviously the potential threat of a, would be a reasonably small skirmish in Cuba, but yet another war? And at some point, do you encourage other countries around the world to increase their use of military power? We're going to get to that. Okay, we'll get to that. So why are we seeing all-time highs in the S &P while there's a war in the Middle East? Number one is the United States is somewhat shielded from the energy crisis that this war is creating, right?

6:23The Straits, key transit point for energy, we all know these details, there's a couple of things that have been, I would say, upside surprises for the world economy. Number one is, for a litany of reasons, China has been able to dramatically reduce the demand for oil. Much more elasticity of demand out of China than anybody had anticipated. You run one of the biggest commodity traders. Did you guys see that coming? Not the degree of the elasticity of demand destruction. So yes, of course, China will find ways to curtail their need for crude. But the magnitude of that curtailment has been stunning.

6:59Number two, is this strategically a decision by Iran or this just happenstance? But there has been a constant, not constant, an episodic flow of oil from the region. You'll get these LNG freighters we'll get out with LNG. You'll see the oil cargoes leave. We've managed to keep oil at roughly a low $100 price versus I would say most estimates were to put us at this point in this war, if the straits are closed, we'd be looking at almost$200 a barrel. Let's talk about in the S &P, the gains are being achieved by a narrow field of companies. and AI is a big part, is a big bet effectively for equity markets.

7:51You've had quite a journey in your thinking around AI. The quote I think recently was on a Friday, you were shocked and depressed coming home, thinking about the implications of what AI will have on society. Maybe just share more about that journey and kind of where's your head today. So we're going to cover a war. We're going to cover shocked and depressed from AI. Is there Is there a happy ending to this conversation today? I'm saving China for later. OK, great. So we've been a huge user of machine learning since TensorFlow came to market about a decade ago. And machine learning has been revolutionary for the US economy in just a plethora of way, from reading radiological reports to self-driving cars to use ChatGPT to rewrite the email that you drafted for the last two minutes.

8:40and it does a much better job than we seem to be able to do. So the big picture is the United States has been undergoing a digital revolution yet again over the last decade, which has accelerated on the back of the AI revolution. And I'll share just a quick story with you. I was with a number of leaders of global multinationals about two years ago, and we were having dinner, and everybody was just effusive as to how AI was transforming their business. And I couldn't help myself. I'm like, let's go around this table and share stories as to how AI is transforming your business. And I got four or five incredible stories of how companies were achieving meaningful productivity gains.

9:18Not one involved AI. Really? Not one. They involved machine learning. They involved optimization. They involved digitization. They involved technology. But within the C-suite, I think the nuance between AI and technology writ large gets a little bit lost often. But your chief technology officers are certainly using bigger budgets, greater CC enthusiasm, to really push through meaningful projects that have a real impact on the bottom line. And you talk about the S &P at all-time highs. Corporate earnings in America are at all-time highs. The multiples actually come down because of that. It's unbelievable, the growth of earnings over the course of just the last 12 months.

10:01So there is a technological revolution happening, of which AI is a component of the story, but it's just a piece. I think that's important point number one. On the going home depressed on a Friday, I'll actually give you the use case. We, one of our team members, built an agentic system to recreate academic papers in finance. So academia publishes a plethora of papers in finance. We read these papers thinking about the hypothesis, the quality of the work done. Do we think what they have observed will have persistence out of sample? Do stock buybacks cause stocks to outperform? Simple example. And you have a legion of young masters and PhDs doing this work.

10:45It takes roughly six to eight weeks to reproduce a paper. It's interesting work. We find a few ideas a year doing this, but for us, a few ideas could be worth quite a bit of money. My colleague built an agentic AI system that would read a paper, reproduce it, verify the results that were published in the paper, produce the results out of sample, and do all this work in about, on average, two to three hours per paper. Oh my God. Right? So here, and here's the key point, this is not just a white collar job. This is a master's or PhD level job. Six weeks of work turned into... OpenAI just solved a math problem that no one had solved for 80 years.

11:21Yes. So what you're seeing is you're seeing AI able to take on some really difficult tasks and crack problems that I think most of us would have viewed beyond the reach of AI just two or three years ago. Okay, so you think about what are the human capital implications of this for your business and for society as a whole? And there's a lot of implications. Now, of note, there's no reduction in headcount that's sitting on the back of this breakthrough. Like, I am incredibly talented people. We have just a huge swath of problems that we're trying to attack and go after. I will take every single productivity gain I can get because with the talented people we have, we just have more to go after.

12:00That's really important for the room to absorb. Around this jobs point, this is going to make Citadel that much more productive. A scary thought, by the way, for the hedge fund industry. But flip it around. There's a second part of this, which is that competitive moats are being filled in at lightning speed. So you get to go home and have two thoughts in your mind at the same time. Wow, think about the impact of this on very high level work in the job market. And in some areas, it's more difficult to transition the employees. For example, if you do translation, you translate from English to German.

12:32That's a real problem. Like, you're going to need real skills retraining. And we as a country need to think about how to use higher education to help these people retrain quickly. But number two, the competitive modes of our society, within our corporate society, are all being filled in at breathtaking rates. Now, what does this mean? This means that we're likely to see a golden age of entrepreneurial activity. Like entrepreneurs will be able to launch new businesses at breathtaking speeds and will be able to take on incumbents in ways that you just couldn't do 5, 10, 15, 20 years ago. Without getting into the details of a business, a friend of a friend as a startup would generally have 30 or 40 people, couldn't afford that many people.

13:17How's he run the business with just a few? Agenic AI systems. We're going to see a lot of these stories come to light over the next couple of years as entrepreneurs embrace this technology to really take on some very interesting opportunities to create value by meeting the needs of customers. It makes a ton of sense. So stay with Citadel for a second. I think in one of our previous sessions, you called stock picking a timeless business. How do you see just the long, short equity business where a number of people allocate capital to changing? What's a PM who does that for Citadel in the future going to look like?

13:52Is it the same set of skills? Are they going to evolve? Are they going to adapt? Look, I think it's a really similar set of skills. I think there'll be more focus and emphasis on those who have really good vision about what companies are actually creating transformative products that will change society. I think there will be much more. The market will reward that far more intensely in the future than will a company beat this quarter's earnings or not. I think the question of will a company beat this quarter's earnings has gotten far more difficult over the last 10 years because, for example, the rise of alternative data.

14:30I have access to the credit cards of millions of Americans. What are they spending money on? What's that mean for Starbucks revenues this quarter? What's it mean for McDonald's this quarter? This is a decade-old transformation. But the here and now is just becoming far more transparent, far more readily understood, and triaged by the combination of really bright people and really good AI technology. Where this will leave us is those who are able to see what is unfolding over years to come will be in a very valued position on a relative basis. That's compelling. At Citadel Securities, this other business we haven't spent much time talking about, you have double-digit market share in a number of different products, inequities, and futures, treasuries.

15:17You keep reading about compute being this critical input into the production of market-making liquidity. You're reading about billion-dollar transactions. Just tell us about how do you think about sourcing compute within the market maker? How important is that for the future? and if you want to take it into distinctions between inference costs versus training costs, how do you sort of see that play out as running one of the most successful, frankly, technology companies in the industry? Look, I mentioned earlier that machine learning has been a critical part of the story of Citadel for a decade, and that's equally true at Citadel Securities.

15:55So we've been using TensorFlow and the subsequent generations of ML models for 10 years. The rise of transformer models and other models of that ilk over the last several years has continued to progress our ability to both price and manage risk. And that's true not just for us, but for a number of other leading market-making firms in the world. We compete for compute access with everybody. I mean, today, I don't know if your iPhone does this, but your text messages get summarized. I don't know if Goldman has your email summarized. we do summarize Goldman Sachs' research, I'm sorry to say. Couldn't help myself.

16:34It's kind of funny. It is amongst the best research. There's a lot of alpha there. That's great. I mean, let's make sure. But there's just a tremendous amount of AI tooling being used in society every day, which has consumed, and this is sort of breathtaking, for all intents and purposes, all the variable compute today is more or less utilized all the time. So the question is, who's willing to pay the most for it? It's just that simple. And the price of compute has certainly gone up per unit of compute beyond where people would have reasonably projected it two or three years ago. And so your large market-making firms that make extensive use of these types of tools are spending today hundreds of millions of dollars on compute.

17:18And that is simply the going market price for this capability. Just like the price of jet fuel is higher today, price of eggs a few months ago is a lot higher than we'd like to see. There's inflation in compute cost. It's just a reality. And people who have lower margin businesses won't be able to bear that cost impact. And those who have higher margin businesses will. It's the nature of where we are today, given the just enormous demand for compute across a litany of different use cases. So all compute manufacturing leads back to this China-Taiwan issue and TSMC. Can you tell us, How do you think about where we are with the China relationship and chip security and investing in the region from your seat?

18:07That is a lot of questions packed into one. Multiple choice. You can start anywhere. Okay, let's start first of all with just the bottom line reality. China is one of the most innovative and fast-growing economies in the world, period. In fact, it's a bit, as an American, I get frustrated by this. out of roughly the 75 most important technologies in the world today, leading with their solar, EV batteries, a variety of different quantum areas. The Chinese lead in about 67, 68 out of 74 technologies. I saw a stat about academic published papers, and they've pulled ahead of the field as well. I'm not surprised.

18:46I mean, fundamentally, 1.4 billion people, large population, extraordinarily strong emphasis on education in their society, like extraordinary. And then a substantially higher number of graduates with STEM degrees. They are creating the human talent that you need to win in a higher value-added, higher intellectual property world. For sure. And the United States needs to wake up to this reality. We need to move our feet and stay focused on the Chinese as a threat in the regime, in the area of the global economy where we have reigned for the last 50 years. The United States has owned the creativity and innovation area of new product development.

19:36And the Chinese historically have been relegated to producing low margin, low value added products designed in America. That is changing. That is a threat to our very way of life. So that is a cold economic reality. And the most important thing we can do as a country is not tariffs. It's we need to educate our youth to be able to stand their ground and out-compete, out-innovate, and out-problem-solve their contemporaries across the ocean. So that's one. Number two is Taiwan's a particularly painful point of potential geopolitical tension. How do we end up here? Right? And it's a situation where there is no winner.

20:22This is a really bad equilibrium because if China takes Taiwan, you know, the rough estimate is if the U.S. loses access to Taiwanese semiconductor chips, our GDP falls by 8 % in six months. Simply put, we go into a Great Depression in the blink of an eye. Unlike any we've seen before. That's staggering. It's staggering. And you go, well, how could that be? Boeing stops making planes in six months. Most new cars stop being manufactured in six months. Consumer electronics stop being made in six months. Everything freezes. TSMC chips are in every high-end product made. They're everywhere. And for China, obviously putting the United States economy into such a tailspin would also have draconian knockout effects to their economy, given how big the United States is as an export market for the world, right?

21:14So there are no winners in a world in which there is military escalation in Taiwan. How do you navigate this prisoner's dilemma as an investor? So as an investor, you need to think about, and I think it varies depending upon where in the worlds you're situated, right? The Chinese, the nature of the economic consequences will be a function of where you sit. And we see that, for example, even in the war with the Middle East, right? The Iranians are very loath to, like, they really want to get oil to China. That's their axis. That's their ally, right? So what you would see in a situation where if Taiwan were a blockade was created around Taiwan, for example, you would see that the nature of sanctions and actions by countries around the world would not be unified in opposition to China anymore, in my opinion.

22:04And so is the country that's your home going to be part of the American sphere of influence? Yeah. Where Europe is in this is actually, I think, a bit of a question mark. We'd like to believe that they would be part of Team USA, but that's less clear today than it was two years ago. And then, for example, the Middle East is clearly going to look to play the role of Switzerland. China is a huge consumer of their primary export product, oil. They're going to look to be able to play the role of Switzerland. So I think where you sit in the world has very important implications about how you think about your China exposure vis-a-vis this one important issue.

22:45That's really insightful. We also took questions from the audience. One conference attendee asked about the outlook for energy production amid the rise of AI. So the United States, from my perspective, has to absolutely embrace how do we become once again a world leader in nuclear and small modular reactors being a big part of that story. But we need to re-embrace nuclear. No carbon footprint to speak of. And nuclear actually has one of the lowest mortality rates of any source of energy we've ever used. Hydro has killed magnitudes more people than nuclear has. So that's one. Number two is solar and wind create sort of the sense of superficial, like, hey, we're environmentally friendly, but solar cells were often made in Western China.

23:32They burned coal to produce the solar cells. It's about a seven-year recovery. You need to capture energy for seven years with solar cells to break even vis-a-vis the coal we use to produce them. And with wind, we still don't know what we're going to do with the turbine blades. They last about 20 years. They're carbon fiber. They don't break down. Like, they're no longer structurally strong enough to use in the turbine, but on the flip side, they don't readily break down. So they're going to fill landfills around the world. They already are to this day. We don't have a clean energy solution yet that's truly clean.

24:04And then until we have, and the holy grail, of course, is nuclear fusion, until we get to nuclear fusion or broader use of nuclear, the United States does have one huge asset. We do have natural gas. And contrary to what you might think in reading the press, the United States is one of the few countries to really brought down its carbon emissions by using natural gas. And we have decades and decades of supply of it at a very low and attractive price. So we need energy. We better damn well build the data centers in America because they're going to get built somewhere in the world. And can you imagine how absolutely inane it would be if we ended up having to be dependent on foreign countries for data centers?

24:42I mean, like, there's this whole not-in-my-backyard ethos in America today. Okay? Tell your data center provider. You want to build a data center, build the corresponding required power generation. Don't put the cost on the consumer. Build the corresponding power generation. Tie the generator to the grid so that you've got reliability by tying yourself to the grid, but build the corresponding generation and build that damn data center in America. It would kill me if we end up having to pay a bunch of foreign countries tens or hundreds of billions of dollars of money a year. It's a hot political issue in a number of states now.

25:18It's a hot political issue. And no one's just taking a step back. They're going to get built. Yeah. Do you want them built here in America? Or do you want them built abroad? Answer that question. Maybe space. Maybe space. Another conference attendee asked how Ken thinks about hedging portfolios for complicated risks. Stress tests. So if this happens, how much money are we going to lose and where? That's what you're trying to get your head around. And is that loss tolerable? You'll never manage your portfolio for every possible tail event, but you should stay very focused on like, what is the worst case scenario?

25:52Can I tolerate that loss? And monitor and maintain your exposures such that that loss is a tolerable loss. It may be an extreme loss, but it's still tolerable, if that makes any sense. Definable, tolerable. Definable, tolerable, still in business, still in a position to fight back from that point. Ken also got a question about the outlook for hedge fund returns. We believe the industry's cost of capital is somewhere around the risk free rate plus 4%. So when the industry, like just long run, we think that's the equilibrium point. If the industry underperforms that, capital will flow out. If the industry outperforms that, capital will flow in.

26:32And in recent years, firms have in general outperformed their cost of capital and there's still a flow of capital into the industry. That bigger capital under management, all else equal, dilutes the alpha. So in some sense, one of the reasons that we've returned$25 or$30 billion to our LPs is to try to maintain a high return on equity. We have a certain amount of alpha we can produce every year. My job is to try to increase the amount of alpha we can produce every year. How much capital do we need to support that investment portfolio to the extent that we're overcapitalized? Put that money back into your hands to allocate into other areas where you can put the money to be disciplined about that.

27:10Try to be. Try to be. And part of this is alignment. The biggest investor in our funds is my partners and myself. So we think that you should always look for in the hedge fund community, like what is the alignment that you have with the GP? Are they in the asset management business or are they in the performance business? This episode was recorded at Goldman Sachs' APEX Symposium on June 2nd, 2026. Thanks for listening. I'm Raj Mahajan.