Bring milk, water, salt, and pepper to boil in medium saucepan over medium-high heat.
Slowly whisk in grits.
Reduce heat to low, cover, and simmer, whisking often, until grits are thick and creamy, about 25 minutes. (Add extra water, 2 tablespoons at a time, if grits become too stiff while cooking.)
Whisk cheddar, into grits until cheese is melted, about 1 minute.
Off heat, season with salt, pepper, and hot sauce to taste.
Serve.
