Given their relevance to drug design and chemical sensing, host–guest interactions are of broad interest in molecular science. Natural and synthetic host molecules provide vehicles for understanding selective molecular recognition in aqueous solution. Here, cryptophane–Xe host–guest systems are considered in aqueous media as a model molecular system that also has important applications. 129Xe–cryptophane systems can be used in the creation of biosensors and powerful contrast agents for magnetic resonance imaging applications. Detailed molecular information on the determinants of Xe affinity is difficult to obtain experimentally. Thus, molecular simulation and free energy perturbation methods were applied to estimate the affinities of Xe for six water-soluble cryptophanes. The calculated affinities correlated well with the previously measured experimental values. The simulations provided molecular insight on the differences in affinities and the roles of conformational fluctuations, solvent, and counter ions on Xe binding to these host molecules. Displacement of confined water from the host interior cavity is a key component of the binding equilibrium, and the average number of water molecules within the host cavity is correlated with the free energy of Xe binding to the different cryptophanes. The findings highlight roles for molecular simulation and design in modulating the relative strengths of host–guest and host–solvent interactions.