fairy
A heterosexual acquaintance texted me asking the difference between fairy and faerie and if the latter could be used as a slur for a gay man the way the former can be. I didn’t know. Despite having played RPGs for the better part of my life, I didn’t know the distinction between fairies and faeries.
The word fairy came into English around the 1300s, when it initially referred to the places where these supernatural beings resided and not the beings themselves. It could also mean “something incredible or fictitious.” That word fairy comes from the Old French faerie, which goes back to the 1200s and could mean “land of fairies, meeting of fairies; enchantment, magic, witchcraft, sorcery.” That word comes from the Latin fata, “the Fates” — as in the three women who are the personification of fate — and that word in turn is the plural of fatum, “that which is ordained; destiny, fate.”
Citing the Century Dictionary, first published in 1889, Etymonline says that fairies are differentiated from elves by virtue of the latter “seeming younger and being more often mischievous.” But fairies weren’t always little humanoids who may or may not have wings, however. For example, Edmund Spenser’s The Faerie Queene features fairy folk who are human-sized and who are essentially just supernatural or magical humans. (The book was published in 1509, when the word fairy would have been in use in England, but Spenser wrote The Faerie Queene to be deliberately archaic.) Etymonline notes this and then also says that in the 1700s the term came to only refer to to the little people, often with wings, but it doesn’t say why. It says that J.R.R.Tolkien may have had something to do with it, but the passage by Tolkien that’s cited, “On Fairy-Stories,” comes from 1947.
Yet I suspect that this flower-and-butterfly minuteness was also a product of "rationalization," which transformed the glamour of Elfland into mere finesse, and invisibility into a fragility that could hide in a cowslip or shrink behind a blade of grass. It seems to become fashionable soon after the great voyages had begun to make the world seem too narrow to hold both men and elves; when the magic land of Hy Breasail in the West had become the mere Brazils, the land of red-dye-wood.
Etymonline continues after this excerpt saying, “Hence, figurative adjective use in reference to lightness, fineness, delicacy. Slang meaning "effeminate male homosexual" is recorded by 1895.”
The entry doesn’t go into it at all, but both Wikipedia and Wiktionary simply note that faerie is for people who, like Edmund Spenser with his florid epic poem, are being deliberately archaic, I presume in the sense of using magick to seem extra old or shoppe to seem extra quaint when anyone who speaks English recognizes that magic and shop are the standard forms of the world. So to answer the original question, I would guess that faerie generally is not used as a disparaging term for gay people — and yes, according to Merriam-Webster, apparently it can be used for gay people in general, not just men, though I’ve never heard it used for anyone but men. But if anyone called a gay person a faerie, I think they’d still get the message.
In addition to fairy, English has fay, also meaning “fairy,” which takes a slightly different route back to the Latin fatum. However, English also has fey — “doomed, marked by foreboding” but also “able to see the future” but also just “otherworldly” — which has a completely different etymology. It comes from old English faege, “doomed to die, fated, destined” but also “timid, feeble,” from a proto-Germanic word. Here’s the weird part, though: the “otherworldly” sense of fey resulted in other meanings such as “excessively refined” and “quaintly unconventional, campy,” both of which link this separate word back with fairy and fay. I would assume that the words sounding so similar led to their meanings converging, but it doesn’t say that anywhere that I have read, so I suppose it’s just a coincidence, implausible though that seems.