Ooooh eu encontrei, eu só preciso usar a sintaxe $'' em vez de $"" :
$ grep -C1 --group-separator=$'\n\n' 'hello' a
hello
this is me
something else
hello hello
bye
De man bash :
QUOTING
Words of the form $'string' are treated specially. The word expands to string, with backslash-escaped characters replaced as specified by the ANSI C standard. Backslash escape sequences, if present, are decoded as follows:
(...) \n new line