Place a rack in the center of the oven, and preheat the oven to 375 degrees F. Place the peeled shrimp in a bowl and toss with olive oil, garlic, cayenne, and salt and pepper to taste. Set aside.
Place the butter in a large oven-proof skillet over medium heat until melted. Add the onion and pepper and stir until soft, 3 minutes. Add the water, cream, and hot sauce, and stir to combine. Increase the heat to bring to a boil, then when boiling, reduce the heat to a simmer and whisk in the grits. Stir and cook until the grits thicken, about 5 to 7 minutes. Turn off the heat, and stir in the cheeses until melted.
Arrange the shrimp in the middle of the grits mixture, pushing them down into the grits. Place the skillet in the oven. Bake until the shrimp have just cooked through, 8 to 10 minutes. Remove and serve warm.