Fairy in novel (fantasy) (3)
I believe the answer is:
elf
'fairy' is the definition.
(elf is a kind of fairy)
'in novel fantasy' is the wordplay.
'in' indicates a hidden word.
'ELF' can be found hidden inside 'novel fantasy'.
(Other definitions for elf that I've seen before include "Magical being" , "Robin Goodfellow?" , "Imaginary small being with magic powers" , "A leprechaun" , "Pixie (able to cobble?)" .)