We use ab initio molecular dynamics simulation to study the effect of hydrophobic groups on the dynamics of water molecules in aqueous solutions of trimethylamine N-oxide (TMAO). We show that hydrophobic groups induce a moderate (<2-fold) slowdown of water reorientation and hydrogen-bond dynamics in dilute solutions, but that this slowdown rapidly increases with solute concentration. In addition, the slowdown factor is found to vary very little with temperature, thus suggesting an entropic origin. All of these results are in quantitative agreement with prior classical molecular dynamics simulations and with the previously suggested excluded-volume model. The hydrophilic TMAO headgroup is found to affect water dynamics more strongly than the hydrophobic moiety, and the magnitude of this slowdown is very sensitive to the strength of the water-solute hydrogen-bond.