A) Link /system/etc/hosts to a partition AdAway can write to
Install symlink_hosts_to_data.zip via your custom recovery (like CWM) to create a symbolic link from /system/etc/hosts to /data/data/hosts. Afterwards you can configure AdAway to use /data/data/hosts (as shown in attached screenshot) and it will work perfectly with updates and everything.
B) Flash the hosts file directly
Install adaway_hosts_2014-04-14.zip via recovery. Now you have the hosts file as AdAway created on April 14th 2014. Disadvantage: you would need to flash again for updates. Advantage: you don't need the AdAway app at all. Note: many custom ROMs include such a hosts file already in their distribution.
C) Make /system partition writable
Use this kernel extension or a custom ROM including it to have the /system partition writable all the time. AdAway will work out-of-the-box then.
If you like to restore original state after having flashed one of the recovery zips above, use the attached restore_original_hosts.zip