The use of parallel tempering or replica exchange molecular dynamics (REMD) simulations has facilitated the exploration of free energy landscapes for complex molecular systems, but application to large systems is hampered by the scaling of the number of required replicas with increasing system size. Use of continuum solvent models reduces system size and replica requirements, but these have been shown to provide poor results in many cases, including overstabilization of ion pairs and secondary structure bias. Hybrid explicit/continuum solvent models can overcome some of these problems through an explicit representation of water molecules in the first solvation shells, but these methods typically require restraints on the solvent molecules and show artifacts in water properties due to the solvation interface. We propose an REMD variant in which the simulations are performed with a fully explicit solvent, but the calculation of exchange probability is carried out using a hybrid model, with the solvation shells calculated on the fly during the fully solvated simulation. The resulting reduction in the perceived system size in the REMD exchange calculation provides a dramatic decrease in the computational cost of REMD, while maintaining a very good agreement with results obtained from the standard explicit solvent REMD. We applied several standard and hybrid REMD methods with different solvent models to alanine polymers of 1, 3, and 10 residues, obtaining ensembles that were essentially independent of the initial conformation, even with explicit solvation. Use of only a continuum model without a shell of explicit water provided poor results for Ala3 and Ala10, with a significant bias in favor of the α-helix. Likewise, using only the solvation shells and no continuum model resulted in ensembles that differed significantly from the standard explicit solvent data. Ensembles obtained from hybrid REMD are in very close agreement with explicit solvent data, predominantly populating polyproline II conformations. Inclusion of a second shell of explicit solvent was found to be unnecessary for these peptides.