Fairy by lake may be menace (5)
I believe the answer is:
peril
'menace' is the definition.
('peril' can be a synonym of 'menace')
'fairy by lake' is the wordplay.
'fairy' becomes 'peri' (Persian mythological being).
'by' is a charade indicator (letters next to each other).
'lake' becomes 'l'.
'peri'+'l'='PERIL'
'may be' is the link.
(Other definitions for peril that I've seen before include "risk" , "Immediate danger" , "Exposure to harm" , "Hazardous situation" , "Quest" .)