Correct, you have to add the fadeout *while* playing; just pressing the fadeout button does nothing if there are no notes being played afterward.
If you've already got an existing recording, yes you can add a fade out manually after the fact without interfering with your existing notes, by going into the midi data, and manually add a volume change every beat or so (and go from whatever the current channel volume is to 0 over the desired length of bars, but at that point it's simpler to just do it through software, as you need to add the same fade data to all tracks.
Mark