There are a couple of different ways people have gone with this, but here's the gist.

By default, magic will work. The energy to work magic is coming from somewhere, even if characters might not have access to it, and might not even be sure what it is. For example, there's a character in-game who depends on his god for magic... And his magic is working, so his god must be... out there somewhere. Or is it? It's a mystery that characters are welcome to ponder.

Alternatively, since the Fade is a place that characters can go to, in a sense, the player can choose to have it be a place they can get to. It's just... limited. And weirdly boring. No other dreamers or monsters, or everything is really mundane. If they're on the ship, the stretch of the Fade may only be as big as the ship's floorplan. Space does weird things to magical dimensions.

Let me know if that helps!