A sheet is a piece of cloth that people sleep underneath. A sheet is often found on a bed. People physically wrap themselves in a sheet if they are cold.  When someone is "wrapped up in themselves", it means that they think only of themselves and quite often. When someone "hogs the sheets" it means that they are taking the sheets all for themselves. This joke is centered on the word "wrapped' and its different meanings.
He who hogs the sheets is usually very wrapped up in himself .