I'm gonna geek out a little here cause it's been a couple years since I seen the film and I've been thinking about it this morning.
It seems like Hanake is differentiating between what I'll call an 'intrinsic morality' and a 'pragmatic morality'.
With a pragmatic morality....if one were to find themselves inside a horror movie (like the villains in 'funny games') there would be no moral perogative to NOT kill a dog....NOT kill a child....NOT kill a family because there are no 'real-world' consequences. No real victims.
But an intrinsic morality results in different behaviour under such circumstances. If you find yourself in the surreal confines of a horror movie....or a lucid dream....or a sexual fantasy....your actions are guided by an internal sense of right and wrong. So even if there are no 'real-world' consequences, you still behave in accordance to an intrinsic moral code....for it's own sake.