Please confirm when the distortion noise is occurring, eg. is it only when starting playback, or is it also present when resuming paused playback or seeking? And how long does it last? Also, does it occur with all of the output systems, ie. the default/DirectSound/ASIO/WASAPI?
The problem with using the output volume level to fade is that it is unlikely to be very smooth; the volume level will change in steps, so the fade needs to be quite long to reduce the size of the steps and avoid the fade possibly causing artifacts itself. For smooth fading, it should be applied in the sample data instead, but it won't always be possible to do that, eg. you can't apply a fade to data that is already in the device's output buffers.