In urban/contemporary fantasy, it is common to have the magical people/creatures be in hiding. There is nothing inherently wrong with that, as longs as it is done well. There are ways to do this well and ways to do this poorly, and if it plays a large role in your story, there should be a good reason to have it.
Humans used to know but have forgotten about it. People don’t forget about things that major. Society isn’t going to forget that there are large groups of people that have magic or can transform into strange creatures. Think about now: there are still stories about werewolves and vampires and many other supernatural creatures. If these were real, inevitably there would be undeniable proof that would keep people from forgetting.
It would be bad for the supernatural people to reveal themselves. This isn’t a bad reason by definition. The problem is more that it is often done poorly or not explained well. For one thing, see above. Why didn’t people know about them before or why didn’t they reveal themselves in a time when it would be accepted? What was the reason for hiding in the beginning that made whatever they had to sacrifice to stay hidden so much better than revealing themselves to start with?
All evidence was erased magically during/after a bad time in their history. By “bad time”, I mean something akin to a witch hunt, or some other reason that there would be a concerted effort to hide the existence of this entire society/culture/species. This is also only possible if the type of magic that the people had allowed for them to erase this from all records. Those “records” probably include people, which would probably mean that the people who knew who weren’t involved either had their memories wiped or were killed.
They are stronger when people don’t know about them. One reason for this could be that there are rituals done by the people with magic that people without magic would object to. Human sacrifices (or even animal sacrifices) are a clear example of this. In general, people get touchy about things like that and would probably stop it. Similarly, in the case of something that feeds off of non-magic people, such as a vampire, if people knew, they would probably fight back and hunt the vampires.
Nobody wants to press the button. If it was tradition for a long time to keep the secret—because, for instance, of a witch hunt in the past—there will be a lot of pressure, especially from the older conservative members of the group, to continue the tradition. Also, nobody will want to be the person to ultimately be responsible for this, because if it goes badly, they will be blamed and castigated for it.
Magic is illegal. This, of course, means that people know about magic, but the people actually with magic would be underground, hiding their magic or even hiding that they exist, period. Having people hide their magic when people know about magic only works if the magically people look or have the ability to look the same as people without magic. If all magical people have green skin or horns or fangs, it will be really difficult for them to hide. But if they look like non-magical people or at least have the ability to look like those people, it is possible. That being said, there needs to be a reason for magic to be illegal beyond just a generic “oh no bad”.
There are a number of different reasons that can be used for why magic is hidden. Not all of them work as well as others, and the reason you use must fit within your story as well as being well explained and rationalized. It is pointless to have something like this if you make up a random reason—or don’t make up any reason at all. Then it is just a plot hole, and it will make your story worse.
