The individual functional traits of different species play a key role for ecosystem function in aquatic and terrestrial systems. We modeled a multispecies predator–prey system with functionally different predator and prey species based on observations of the community dynamics of ciliates and their algal prey in Lake Constance. The model accounted for differences in predator feeding preferences and prey susceptibility to predation, and for the respective trade‐offs. A low food demand of the predator was connected to a high food selectivity, and a high growth rate of the prey was connected to a high vulnerability to grazing. The data and the model did not show standard uniform predator–prey cycles, but revealed both complex dynamics and a coexistence of predator and prey at high biomass levels. These dynamics resulted from internally driven alternations in species densities and involved compensatory dynamics between functionally different species. Functional diversity allowed for ongoing adaptation of the predator and prey communities to changing environmental conditions such as food composition and grazing pressure. The trade‐offs determined whether compensatory or synchronous dynamics occurred which influence the variability at the community level. Compensatory dynamics were promoted by a joint carrying capacity linking the different prey species which is particularly relevant at high prey biomasses, i.e., when grazers are less efficient. In contrast, synchronization was enhanced by the coupling of the different predator and prey species via common feeding links, e.g., by a high grazing pressure of a nonselective predator. The communities had to be functionally diverse in terms of their trade‐offs and their traits to yield compensatory dynamics. Rather similar predator species tended to cycle synchronously, whereas profoundly different species did not coexist. Compensatory dynamics at the community level thus required intermediately strong trade‐offs for functional traits in both predators and their prey.