Hierarchical Smart Playlists are dynamically updated through iTunes but not on the iPod nano itself. Any Smart Playlist that contains hierarchical conditions (in which you specify sets of rules) will become a static playlist on the iPod device until you sync to iTunes, which will then update the playlist.
For example, the hierarchical Smart Playlist below created in iTunes for Unknown Artist (substitute an artist of your choice) will result in new songs by Unknown Artist with five-star ratings and will sync to your iPod nano when connected to iTunes.
But, once synced with iTunes, the playlist will stay static on the iPod nano. If you decide to change the rating of a song on the iPod nano (that is, give another Unknown Artist song a five-star rating or remove a five-star rating from an Unknown Artist song) the Smart Playlist will not update dynamically on the iPod. However, once you sync your iPod to iTunes, the ratings for those songs will be updated on your iTunes music library and your hierarchical Smart Playlist will update the iPod the next time you sync with iTunes.